VI. CLASSES OF CORPORATIONS UNDER THE CORP. CODE Collector of Internal Revenue vs. Club Filipino G.R.

L-12719; May 31, 1962 FACTS: Club Filipino is a civic organization organized under the Philippine laws. However, neither in the articles or bylaws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club’s remaining assets, after paying debts, shall be donated to a charitable Philippine institution in Cebu. The Club owns a club house, a bowling alley, a golf course and a bar restaurant. The Club is operated mainly with funds derived from membership and dues. The Club declared stock dividends but no actual cash dividends were distributed to stockholders. ISSUE: WON Club Filipino is a stock corporation. HELD: The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the

holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. VIII. INCORPORATION Philippine Trust Co. vs. Rivera G.R. No. L-19761; January 29, 1923 FACTS: Cooperative Naval Filipinas was incorporated under the Philippine laws. Mariano Rivera was one of the incorporators. The AOI were registered in the Bureau of Commerce and Industry. In the course of time, the corporation became insolvent and went into the hands of Phil. Trust Co., as assignee in bankruptcy. The latter instituted an action to recover unpaid stock subscription of defendant. Defendant insists the resolution that has been made on the reduction of the capital, the reason why he did not fully pay the entire subscription. ISSUE: WON the reduction of the corporate capital by releasing the subscribers from payment of their subscription is valid and proper. HELD: It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber
∞ compiled/edited/digest: KWYB -1-

to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary In the case at bar, therefore held that the resolution relied upon the defendant was without effect and that the defendant was still liable for the unpaid balance of his subscription. Marcus vs. RH Macy 74 N.E. 2d 228; 1947 FACTS: The Board of Directors gave notice to SH that among the matters to be acted upon in its annual meeting would be a proposal to amend certificate of incorporation to add to the rights of preferred stockholders, voting rights equal to those of common stockholders. Marcus objected and demanded payment for the common stock owned by her. ISSUE: WON Marcus can exercise her appraisal right. HELD: The Court held that Marcus may invoke her appraisal right. The aggregate number of shares having voting rights equal to those of common shares was substantially increased and thereby the voting power of each common share outstanding prior to the meeting was altered or limited by the resulting pro rata diminution of its potential worth as a factor in the management of the corporate affairs. Considering that she held diminished voting power; that she notified the corporation of her objection; that her shares were voted against the amendment—these were sufficient to qualify her to invoke her statutory appraisal right.

Iglesia Evangelica Metodista En Las Islas Filipinas vs. Bishop Lazaro G.R. No. 184088; July 6, 2010 FACTS; IEMELIF is a corporation sole. It was registered and by-laws were created which empowered the election of officers to manage the affairs of the organization. Although, the petitioner remained a corporation sole on paper, it had always acted like a corporation aggregate. The Consistory, IEMELIF’s BOD, together with the general membership change the organizational structure from corporation sole to corporation aggregate, which was approved by SEC. However, the corporate papers remained unaltered as a corporation sole. About 28 years later, the issue reemerge. The SEC answered, this time, is that the conversion was not properly carried out and documented and that it needed to amend its AOI for that purpose. Acting on the advice, the Consistory resolved to convert but petitioner Rev. Nestor Pineda in IEMELIF’s name did not support the conversion. Petitioners claim that a complete shift from IEMELIF’s status as a corporation sole to a corporation aggregate required, not just an amendment of the IEMELIF’s articles of incorporation, but a complete dissolution of the existing corporation sole followed by a re-incorporation. ISSUE: WON a corporation sole may be converted into a corporation aggregate by mere amendment of its articles of incorporation. HELD: A corporation may change its character as a corporation sole into a corporation aggregate by mere amendment of its articles of incorporation without first going through the process of dissolution.
∞ compiled/edited/digest: KWYB -2-

True, the Corporation Code provides no specific mechanism for amending the articles of incorporation of a corporation sole. However, Section 109 of the Corporation Code allows the application to religious corporations of the general provisions governing non-stock corporations. For non-stock corporations, the power to amend its articles of incorporation lies in its members. The code requires two-thirds of their votes for the approval of such an amendment. So how will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization? Although a non-stock corporation has a personality that is distinct from those of its members who established it, its articles of incorporation cannot be amended solely through the action of its board of trustees. The amendment needs the concurrence of at least two-thirds of its membership. If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership. The one member, here the General Superintendent, is but a trustee, according to Section 110 of the Corporation Code, of its membership. There is no point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. Whether it is a non-stock corporation or a corporation sole, the corporate being remains distinct from its members, whatever be their number. The increase in the number of its corporate membership does not change the complexion of its corporate responsibility to third parties. The one member, with the concurrence of twothirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with membership concurrence, increase the technical number of the members of the corporation from “sole” or one to the greater number authorized by its amended articles.

Gamboa vs. Teves G.R. No. 176579; June 28, 2011 This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kongbased investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With this sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%, thus: Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; x x x ISSUE: Does the term “capital” in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility? HELD:
∞ compiled/edited/digest: KWYB -3-

[The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, i.e., to the total common shares in PLDT.] Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors. To construe broadly the term “capital” as the total outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and letter of the Constitution that the “State shall develop a selfreliant and independent national economy effectively controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.

downpayment of the purchase price in cash while the other half were made in post-dated checks. Subsequently, the post-dated checks were dishonoured which prompted YASCO to file an action for collection of sum of money in RTC of Cebu. Roxas failed to answer hence he was declared in default. Without waiting for the resolution of the motion for lifting the order of default, he filed a petition for certiorari in CA on the ground of improper venue. ISSUE: WON the venue was improperly laid. HELD: A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation. The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines." The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory. Actions cannot be filed against a corporation in any place where the corporation maintains its branch offices. The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices, would create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be allowed to file personal actions in a place other than its principal place of business unless such a place is also the residence of a co-plaintiff or a defendant. With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu

Young Auto Supply vs. CA G.R. No. 104175; June 25, 1993 FACTS: YASCO sold all their shares of stock in CMDC to George Roxas. The latter was able to make a 50%

∞ compiled/edited/digest: KWYB

-4-

City as the venue. The decision of the Court of Appeals was set aside. Philips Export B.V. vs. CA G.R. No. 96161; February 21, 1992 FACTS: Philips Export B.V. (PEBV) filed with the SEC for the cancellation of the word “Philips” the corporate name of Standard Philips Corporation in view of its prior registration with the Bureau of Patents and the SEC. However, Standard Philips refused to amend its Articles of Incorporation so PEBV filed with the SEC a petition for the issuance of a Writ of Preliminary Injunction, however this was denied ruling that it can only be done when the corporate names are identical and they have at least two words different. This was affirmed by the SEC en banc and the Court of Appeals thus the case at bar. ISSUE: WON Standard Philips can be enjoined from using Philips in its corporate name. HELD: YES. A corporation’s right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the whole world. According to Sec. 18 of the Corporation Code, no corporate name may be allowed if the proposed name is identical or deceptively confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law. For the prohibition to apply, two requisites must be present: (1) the complainant corporation must have acquired a prior right over the use of such corporate name and; (2) the proposed name is either identical or deceptively or confusingly similar to that of any existing corporation or

to any other name already protected by law or patently deceptive, confusing or contrary to existing law.

Lyceum of the Phils. vs. CA G.R. No. 101897; March 5, 1993 FACTS: Petitioner is an educational institution duly registered with the SEC since 1950. Before the case at bar, petitioner commenced a proceeding against Lyceum of Baguio with the SEC to require it to change its corporate name and adopt a new one not similar or identical to the petitioner. SEC granted noting that there was substantial similarity because of the dominant word “Lyceum”. CA and SC affirmed. Petitioner filed similar complaint against other schools and obtains a favorable decision from the hearing officer. On appeal, SEC en banc reversed the decision and held that the word Lyceum has not become so identified with the petitioner and that the use thereof will not cause confusion to the general public. ISSUES: 1. WON the corporate names of the private respondents are identical with or deceptively similar to that of the petitioner. 2. WON the use by the petitioner of Lyceum in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (Doctrine of Secondary meaning). HELD: NO, to both. True enough, the corporate names of the parties carry the word “Lyceum” but confusion and deception are precluded by the appending of geographic names. Lyceum generally refers to a school or an institution of learning and it is natural to use this word to designate an
∞ compiled/edited/digest: KWYB -5-

entity which is organized and operating as an educational institution. Doctrine of Secondary meaning is a word of phrase originally incapable of exclusive appropriation, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. Lyceum of the Philippines has not gained exclusive use of “Lyceum” by long passage of time. The number alone of the private respondents suggests strongly that the use of Lyceum has not been attended with the exclusivity essential for the applicability of the doctrine. It may be noted that one of the respondents – Western Pangasinan Lyceum used such term 17 years before the petitioner registered with the SEC. Moreover, there may be other schools using the name but not registered with the SEC because they have not adopted the corporate form of organization. Armco Steel Corp. vs. SEC G.R. No. L-54580; December 29, 1987 FACTS: ARMCO Steel Corp. is a corporation organized in Ohio, USA, hereinafter called ARMCO-OHIO. ARMCO Marsteel-Alloy Corporation was incorporated in the Philippines under its original name Marsteel Alloy Company, Inc. but its name was changed to ARMCO-Marsteel Alloy Corporation hereinafter called ARMCO-Marsteel, by amendment of its Articles of Incorporation after the ARMCOOhio purchased 40% of its capital stock. Both said corporations are engaged in the manufacture of steel products. On the other hand, ARMCO Steel Corporation was incorporated in the Philippines, hereinafter called ARMCOPhilippines. A pertinent portion of its articles of incorporation provides as among its purposes: "to contract,

fabricate ... manufacture ... regarding pipelines, steel frames ... ." ARMCO-Ohio and ARMCO-Marsteel then filed a petition in the SEC to compel ARMCO-Philippines to change its corporate name on the ground that it is very similar, if not exactly the same as the name of one of the petitioners. SEC granted the petition. Respondent amended its articles of incorporation by changing its name to "ARMCO structures, Inc." which was filed with and approved by the SEC. Petitioners filed a comment alleging that the change of name of said respondent was not done in good faith and is not in accordance with the order of the Commission which was to take out ARMCO and substitute another word in lieu thereof in its corporate name by amending the articles of incorporation. ISSUE: WON ARMCO-Philippines had substantially complied in good faith with said order and said compliance had achieved the purpose of the order, by changing its corporate name with the approval of SEC. HELD: NO. The said amendment in the corporate name of petitioner is not in substantial compliance with the order. To repeat, the order was for the removal of the word "ARMCO" from the corporate name of the petitioner which it failed to do. And even if this change of corporate name was erroneously accepted and approved in the SEC it cannot thereby legalize nor change what is clearly unauthorized if not contemptuous act of petitioner in securing the registration of a new corporate name against the very previous order of the SEC. Certainly the said previous order is not rendered functus oficio thereby. Had petitioner revealed at the time of the registration of its amended corporate name that there was the said order, the registration of the amended corporate name could not have been accepted and approved by the persons in-charge of

∞ compiled/edited/digest: KWYB

-6-

the registration. The actuations in this respect of petitioner are far from regular much less in good faith. Noted in fact, ARMCO STEEL-PHILIPPINES has not only an identical name but also a similar line of business. People who are buying and using products bearing the trademark "Armco" might be led to believe that such products are manufactured by the respondent, when in fact, they might actually be produced by the petitioners. Thus, the goodwill that should grow and inure to the benefit of petitioners could be impaired and prejudiced by the continued use of the same term by the respondent. P.C. Javier & Sons vs. CA G.R. No. 129552; June 29, 2005 FACTS: Petitioner applied with First Summa Bank for a loan accommodation under the Industrial Guarantee Loan Fund (IGLF). The corporation through Pablo Javier was advised that its loan application was approved and that the same shall be forwarded to the Central Bank for processing. The Central Bank released the loan. To secure the loan, Javier executed chattel mortgage in favor of the bank. In the meantime, the bank changed its named to PAIC Savings and Mortgage Bank Inc. Thereafter, the corporation failed to pay; this prompted the bank to move for the extrajudicial foreclosure of the mortgages. Petitioner filed an action to restrain the extrajudicial foreclosure on the ground that First Summa Bank and PAIC Bank are separate entities. ISSUE: WON the debtor should be formally notified of the corporate creditor’s change of name. HELD: NO. There is no such requirement under the law or any regulation ordering a bank that changes its corporate name to formally notify all its debtors. This Court cannot

impose on a bank that changes its corporate name to notify a debtor of such change absent any law, circular or regulation requiring it. Such act would be judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such notification remains to be a mere internal policy that banks may or may not adopt. A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. Pioneer Insurance vs. CA G.R. No. 84197; July 28, 1989 FACTS: Jacob S. Lim is an owner-operator of Southern Airlines (SAL), a single proprietorship. Japan Domestic Airlines (JDA) and Lim entered into a sales contract. Pioneer Insurance and Surety Corp. as surety executed its surety bond in favor of JDA on behalf of its principal Lim. Border Machinery and Heacy Equipment Co, Inc., Francisco and Modesto Cervantes, and Constancio Maglana contributed funds for the transaction based on the misrepresentation of Lim that they will form a new corporation to expand his business. Lim as SAL executed in favor of Pioneer a deed of chattel mortgage as security. Restructuring of obligation to change the maturity was done twice without the knowledge of the other defendants. Upon default on the payments, Pioneer paid for him and filed a petition for the foreclosure of chattel mortgage as security. Maglana, Bormaheco and the Cervantes’s filed cross-claims against Lim alleging that
∞ compiled/edited/digest: KWYB -7-

they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. ISSUE: WON failure of the respondents to incorporate automatically resulted to de facto partnership. HELD: NO. Partnership inter se does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners as between themselves, when their purpose is that no partnership shall exist and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. The petitioner, in his answer, denied having received any amount from respondents Bormaheco, the Cervantes’s and Maglana. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. Applying therefore the principles of law, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. Municipality of Malabang vs. Benito G.R. No. L-28113; March 28, 1969 FACTS:

Petitioner Balindong is the municipal mayor of Malabang, Lanao del Sur while respondents are Mayor Benito and councilors of Municipality of Balabagan of the same province. Balabagan (formerly part of Malabang) was created by Executive Order 386 of the then President Carlos P. Garcia, out of barrios and sitios of the Malabang. Citing Pelaez ruling that Republic Act 2370 (Barrio Charter Act), vested power to create barrios in the provincial board, and Section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is unconstitutional. Petitioner sought to nullify E.O. 386 and restrain respondents from performing their official functions. Respondents argued that Pelaez ruling did not apply because unlike the municipalities involved therein, the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared unconstitutional (by Pelaez ruling), its officers having been either elected or appointed, and the municipality itself having discharged its corporate functions for the past five years preceding the institution of this action. ISSUE: WON a corporation organized under a statute subsequently declared void acquires status as ‘de facto’ corporation. HELD: NO. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a ‘de facto’ corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a ‘de facto’ corporation since there is no other valid statute to give color of authority to its creation.

∞ compiled/edited/digest: KWYB

-8-

Hall vs. Piccio G.R. No. L-2598; June 29, 1950 FACTS: Petitioners Arnold Hall, Bradley Hall and private respondents Fred Brown, Emma Brown, Hipolita Chapman and Ceferino Abella signed and acknowledged the AOI of the Far Eastern Lumber and Commercial Co., Inc. organized to engage in a general lumber business to carry on as general contractors, operators and managers. Immediately after the execution of the articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. Then, the articles of incorporation were filed in SEC for the issuance of the corresponding certificate of incorporation. Pending action on the AOI, private respondents filed a civil case against the Halls alleging among other things that Far Eastern Lumber and Commercial Co, was an unregistered partnership and that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. The petitioners filed a Motion to Dismiss contesting the court’s jurisdiction and the sufficiency of the cause of action but Judge Piccio ordered the dissolution of the company and appointed a receiver. ISSUE: WON the court had jurisdiction to decree the dissolution of the company because it being a de facto corporation, dissolution may only be ordered in a quo warranto proceeding in accordance with Section 19. HELD: YES. The court had jurisdiction but Section 19 does not apply. It held that there was no ‘de facto’ corporation on the ground that the corporation cannot claim to be in ‘good

faith’ to be a corporation when it has not yet obtained its certificate of incorporation. The immunity of collateral attack is granted to corporations “claiming in good faith to be corporation under this act.” Such a claim is compatible with the existence of errors and irregularities but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law, the claim to be a corporation “under this act” could not be made “in good faith.” Moreover, this is not a suit in which the corporation is a party. This is litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state. Cagayan Fishing vs. Sandiko G.R. No. L-43350; December 23, 1937 FACTS: Manuel Tabora is the registered owner of four parcels of land. The four parcels were mortgaged for loans and indebtedness. However, Tabora executed a public document (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, which at that time is still under the process of incorporation. A year later, the BOD of said company adopted a resolution authorizing its president to sell the four parcels of lands in question to Teodoro Sandiko. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale where the plaintiff sold, ceded and transferred to the defendant the four parcels of land. Exhibit C is a promissory note drawn by the defendant in favor of the plaintiff. Exhibit D is a deed of mortgage executed where the four parcels of land were given a security for the payment of the promissory note. Defendant failed to pay thus plaintiff filed a collection of sum of money in the Court of First Instance in
∞ compiled/edited/digest: KWYB -9-

Manila. The latter rendered judgment absolving the defendant. Plaintiff has appealed to this court and makes an assignment of various errors. ISSUE: valid. HELD: NO. The transfer was made almost five months before the incorporation of the company. Although, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary. However before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation. Although there is a presumption that all the requirements of law have been complied with, in the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale. It was not even a de facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to enter into the contract. Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. It should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. Harill vs. Davis 168 F. 187; 1909 FACTS: The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the WON the sale made by the plaintiff corporation is

judicial district where the business was located. Arkansas law requires filing in both offices. ISSUE: Was there ‘colorable’ compliance enough to give the supposed corporation at least the status of a ‘de facto’ corporation? HELD: NO. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid incorporation). Asia Banking Corp. vs. Standard Products Co. G.R. No. 22106; September 11, 1924 FACTS: The plaintiff corporation sued defendant corporation for failure to pay the promissory note. Trial court rendered judgment in favor of plaintiff. Defendant appealed and its defense was that the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error. ISSUE: WON plaintiff was unable to prove its corporate existence. HELD:
∞ compiled/edited/digest: KWYB - 10 -

NO. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. Hence, the defendant is estopped from denying its own corporate existence. It is also estopped from denying the other’s corporate existence. Cranson vs. International Business Machines Corp. 234 MD. 477, 200 A. 2D 33; 1964 FACTS: Cranson was asked to be an investor in a new business corporation and after he acceded, there are other people who had formed the corporation with him. A stock certificate evidencing his ownership of shares in the corporation was given to him. The transactions were done as if it were a corporation and eventually Cranson was elected president and all the dealings with IBM were conducted by him for the corporation. At no time did he assume personal obligation or pledge his individual credit to IBM. But the lawyers of the corporation made an oversight of not filing the certificate of incorporation and when claim for payment were charged against the Real Estate Service Bureau, IBM charged Cranson in his personal capacity. ISSUE: WON a defectively incorporated association would warrant a charge against officers in their personal capacity. HELD:

NO. Traditionally, two doctrines have been used by the courts to clothe an officer of a defectively incorporated association with the corporate attribute of limited liability. The first, often referred to as the doctrine of de facto corporations, has been applied in those cases where there are elements showing: (1) the existence of law authorizing incorporation: (2) an effort in good faith to incorporate under the existing law; and (3) actual user or exercise of corporate powers. The second, doctrine of estoppel: employed when the person seeking to hold the officer personally liable has contracted or otherwise dealt with the association in such a manner as to recognize and in effect admit its existence as a corporate body. When there is a concurrence of the three elements necessary for the application of the de facto corporation doctrine, there exists an entity which is a corporation de jure against all persons BUT THE STATE. On the other hand, the estoppel theory is applied only to the facts of each particular case and may be invoked even when there is no corporation de facto. IBM, having dealt with the Bureau as if it were a corporation and relied on its credit rather than that of Cranson, is estopped to assert that the Bureau was not incorporated at the time the typewriters were franchised. Where one has recognized the corporate existence of an association, he is estopped to assert the contrary with respect to claim arising out of such dealings.

Salvatierra vs. Garlitos et. al. G.R. No. L-11442; May 23, 1958 FACTS: Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. The

∞ compiled/edited/digest: KWYB

- 11 -

president of the corporation complains for being held personally liable. ISSUE: WON the president can be personally held liable to plaintiff. HELD: YES. He is liable. The general rule is that a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is ESTOPPED from denying the same in an action arising out of such transaction or dealing, unless there is fraud in the transaction. A person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. Albert vs. University Publishing Co. G.R. No. L-19118; January 30, 1965 FACTS: Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M.

Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. ISSUE: WON Aruego can be held personally liable to the plaintiff. HELD: YES. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law. Chiang Kai Shek School vs. CA G.R. No. L-58028; April 18, 1989 FACTS: Fausta F. Oh reported for work at the Chiang Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked for she had been teaching in the school since1932 for a continuous period of almost 33 years. And now, for no apparent or given reason, this abrupt dismissal. She demanded separation pay, social security benefits, salary

∞ compiled/edited/digest: KWYB

- 12 -

differentials, maternity benefits and moral and exemplary damages. The original defendant was the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be sued, the complaint was amended. Certain officials of the school were also impleaded to make them solidarily liable with the school. Court of First Instance of Sorsogon dismissed the complaint. On appeal, its decision was set aside by the respondent court, which held the school suable and liable while absolving the other defendants. ISSUE: WON a school that has not been incorporated may be sued by reason alone of its long continued existence and recognition by the government. HELD: YES. Having been recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days from such recognition. It appears that it had not done so at the time the complaint was filed notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot now invoke its own noncompliance with the law to immunize it from the private respondent's complaint. There should also be no question that having contracted with the private respondent every year for thirty two years and thus represented itself as possessed of juridical personality to do so, the petitioner is now estopped from denying such personality to defeat her claim against it. According to Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying on it." Lim Tong Lim vs. Phil. Fishing Gear Industries G.R. No. 136448; November 3, 1999

FACTS: Chua and Yao entered into a contract for the purchase of fishing nets on behalf of Ocean Quest Fishing Corp. from Phil Fishing Gear Industries. Chua and Yao claimed that they were engaged in a business with Lim Tong Lim but who was not a signatory to the agreement. They failed to pay thus PFGI filed collection suit against the three: Chua, Yao and Lim as general partners because Ocean Quest is a non-existing corporation as shown by a certificate from SEC. Lim filed for the lift of the Writ of Attachment but RTC maintained the writ and ordered the sale of the nets. RTC maintains that there is partnership because of the Compromise Agreement entered by them, although silent as to the nature of their obligations but presumes that there is equal distribution of the profit and loss. CA affirmed. ISSUE: WON Lim may be regarded as a partner when the sole basis is the Compromise Agreement and not considering the fact that he has not signed any transaction nor met any of the representatives of the Phil. Fishing Gears. HELD: YES. There is partnership. It is clear in the factual findings that they have decided to engage in a fishing business where they bought boats from the loan they got from J. Lim, who is Lim’s brother. The partnership extended not only to the boats but also to the nets and the floats. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess of loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term “common fund” under Article 1767. The contribution to such fund need not be case of fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profits from the sale and operation of the
∞ compiled/edited/digest: KWYB - 13 -

boats would be divided early among them also shows that they had indeed formed a partnership. Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by person with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.

International Express Travel vs. CA G.R. No. 119002; October 19, 2000 FACTS: Express Travel wrote a letter to the Phil. Football Federation thru the president Henry Kahn offering its services to the latter and Kahn accepted this. The federation consisting of athletes and officials, went to the South East Asian Games in Malaysia and other trips to other countries. Federation incurred expenses and made two partial payments. Kahn issued a personal check as a partial payment then failed to pay thereafter. Express Travel sued Henry Kahn in his personal capacity and as president and impleaded the federation as an alternative defendant. Henry Kahn allege that there is no cause of action against him in his personal capacity or official capacity and that he did not guarantee the payment and merely acted as an agent. RTC ruled that Henry Kahn is personally liable and that there is no proof that the federation has a corporate existence. CA reversed on the ground that Federation has juridical existence. ISSUE: WON Federation has a juridical existence. HELD:

NO. The basis of CA that RA 3135 Revised Charter of the Phil. Amateur Athletic Federation and PD 604 that recognizes the juridical existence of National Sports Association is not correct. Mere passage of these laws DOES NOT AUTOMATICALLY vest the associations a CORPORATE STATUS. The State must give its consent: in the form of a special law of a general enabling act. These laws merely recognized the existence of national sports associations. Henry Kahn shall be held liable for the unpaid obligations of the unincorporated Federation. It is a settled rule that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. Petitioner cannot be held estopped because the doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective corporation. Petitioner is not trying to escape liability but is the one claiming from the contract. IX. INTERNAL ORGANIZATION OF CORPORATIONS Loyola Grand Villas Homeowners vs. CA G.R. No. 117188; August 7, 1997 FACTS: HIGC (Guaranty Corp), a quasi-judicial body, recognized LGVHAI as the sole homeowners’ association in Loyola Grand Villas in Marikina and QC. HIGC revoked the certificate of North Association and South Association. North is registered with HIGC and has submitted its by-laws. When Soliven inquired about the status of the LGVHAI, he was told by the legal counsel of HIGC that LGV has been AUTOMATICALLY dissolved because it did not
∞ compiled/edited/digest: KWYB - 14 -

submit its by-laws and that it has been a non-user of the corporate charter because HIGC did not receive any report on the association activities. Apparently, this information resulted in the registration of South Association with HIGC and subsequently filed its by-laws. These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI’s certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. ISSUE: WON the failure of a corporation to file its by-laws within one (1) month from the date of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution.

Fleischer vs. Botica Nolasco Inc. G.R. No. L-23241; March 14, 1925 FACTS: Manuel Gonzales made a written statement to the respondent, requesting that 5 shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares but later withdrew and cancelled his written statement. However, the respondent replied that his letter was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc. Fleischer filed an amended complaint against the respondent, alleging that he became the owner of 5 shares of fully paid stock purchase by him from the original owner, Manuel Gonzalez. Despite repeated demands, respondent refused to register said shares in his name in the books of the corporation. Respondent’s defense is that it has preferential right to buy the shares at the par value based on their Art. 12 of the by-laws. Trial court favored petitioner and ordered the shares be registered. Hence, this appeal. ISSUE:

HELD:

No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. Incorporators must be given the chance to explain their neglect or omission and remedy the same. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. There must be a hearing to determine the existence of the ground and assuming that there is such finding, the penalty is not revocation but may be only suspension of the charter. Although, the code is silent on the result of the failure to adopt and file the by-laws within the required period. PD 902-A provides, it is clear that the failure to file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations.

WON respondent’s Art. 12 of the by-laws is in conflict with the Corporation Law (now Corporation Code). HELD: YES. Although the corporation is empowered to make by-laws, the same must not be inconsistent with any existing law, for the transferring of its stocks. By-law should be in harmony with the law on the subject of transfer of stock. By-laws are intended for the protection and regulation of the corporation and not for restriction. As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into
∞ compiled/edited/digest: KWYB - 15 -

effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporation books and cannot justify an restriction upon the right of sale. NOTE: The Corporation Code allows reasonable transfer restriction in close corporations. Government of Philippine Islands vs. El Hogar Filipino G.R. No. L-26649; July 13, 1927 FACTS: The plaintiff instituted a quo warranto proceeding against respondent for the purpose of depriving it of its corporate franchise, excluding from it all corporate rights and privileges and effecting a final dissolution of the corporation. The by-laws of the corporation states a provision that: the BOD, by vote of an absolute majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE OWNER thereof the balance resulting from the liquidation thereof, whenever, by reason of their conduct of any other motive, the continuation as members of the owners of such shares is not desirable. The plaintiff questioned the validity because it conflicts with the Corporation Law which declares that the BOARD SHALL NOT HAVE THE POWER TO FORCE THE SURRENDER AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN CASE OF LIQUIDATION OF THECORPORATION OR OF FORFEITURE OF THE STOCK FOR DELINQUENCY. Second cause of action of the plaintiff was based on the BOD’s failure to hold annual meetings and fill vacancies. There is also a provision in the by-laws that the directors shall elect from among the shareholder members to fill the vacancies that may occur in the BOD until the election at the general meeting.

Third cause of action is the fact the directors of El Hogar have been receiving large compensation because the by-laws provide a 5% of the net profit shown by the annual balance sheet to be distributed to the directors in proportion to their attendance at meetings of the board. Fourth cause of action, procedures to adopt when one is elected as a BOD must own at least P5000 pay-up of shares as security. ISSUES: First, is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid? Second, is mere failure to elect officers terminates the term of existing officers? Third, is a provision in the by-laws fixing the salary of directors valid? Fourth, is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid? HELD: First. No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corporation Law which prohibits forced surrender of unmatured stocks except in case of dissolution. Second. No. Unless the law or the charter of the corporation expressly provides that an office shall become at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to hold over until his successor is duly qualified. MERE FAILURE OF A CORPORATION TO ELECT OFFICERS DOES NOT TERMINATE THE TERM OF EXISTINGOFFICERS AND DISSOLVE THE CORPORATION. Third. Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. The remedy is in the hands of the stockholders. Fourth. Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors and the requirement of security from them for the proper discharge of the duties of their office.
∞ compiled/edited/digest: KWYB - 16 -

Gokongwei Jr. vs. SEC et. al. G.R. No. L-45911; April 11, 1979 FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration of nullity of the bylaws etc. against the majority members of the BOD and San Miguel. It is stated in the by-laws that the amendment or modification of the by-laws may only be delegated to the BOD’s upon an affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 could have been computed on the basis of the capitalization at the time of the amendment. Petitioner contends that the amendment was based on the 1961 authorization, the Board acted without authority and in usurpation of the power of the stockholders in amending the by-laws in 1976. He also contends that the 1961 authorization was already used in 1962 and 1963. He also contends that the amendment deprived him of his right to vote and be voted upon as a stockholder (because it disqualified competitors from nomination and election in the BOD of SMC), thus the amended by-laws were null and void. While this was pending, the corporation called for a stockholder’s meeting for the ratification of the amendment to the by-laws. This prompted petitioner to seek for summary judgment. This was denied by the SEC. In another case filed by petitioner, he alleged that the corporation had been using corporate funds in other corporations and businesses outside the primary purpose clause of the corporation in violation of the Corporation Code. ISSUE: Are the amendments in the by-laws are valid? HELD: YES. The validity and reasonableness of a by-law is purely a question of law. Whether the by-law is in conflict

with the law of the land, or with the charter of the corporation or is in legal sense unreasonable and therefore unlawful is a question of law. However, this is limited where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised authority. The Court held that a corporation has authority prescribed by law to prescribe the qualifications of directors. It has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. A corporation, under the Corporation law, may prescribe in its by-laws the qualifications, duties and compensation of directors, officers, and employees. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and he impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of incorporation and lawfully enacted by-laws and not forbidden by law. Any corporation may amend its by-laws by the owners of the majority of the subscribed stock. It cannot thus be said that petitioners has the vested right, as a stock holder, to be elected director, in the face of the fact that the law at the time such stockholder's right was acquired contained the prescription that the corporate charter and the by-laws shall be subject to amendment, alteration and modification. A Director stands in a fiduciary relation to the corporation and its shareholders, which is characterized as a trust relationship. An amendment to the corporate by-laws which renders a stockholder ineligible to be director, if he be also director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. This is based upon the principle that
∞ compiled/edited/digest: KWYB - 17 -

where the director is employed in the service of a rival company, he cannot serve both, but must betray one or the other. The amendment in this case serves to advance the benefit of the corporation and is good. Corporate officers are also not permitted to use their position of trust and confidence to further their private needs, and the act done in furtherance of private needs is deemed to be for the benefit of the corporation. This is called the doctrine of corporate opportunity. Grace Christian High School vs. CA G.R. No. 108905; October 23, 1997 FACTS: Grace Christian High School is an educational institution at the Grace Village in Quezon City. Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village. In 1968, the by-laws of the association provide that the annual meeting of the members shall be held per calendar year and that the election of the BOD shall be by plurality of votes. In 1975, a committee of the BOD prepared a draft of an amendment to the by-laws a substantial addition was made wherein GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION. However, said draft was never presented to the general membership for approval. Nevertheless, Grace Christian High School was given a permanent seat in the board of directors of the association. On 1990, the association's committee decided to reexamine the 1975 by-laws for the reason that there was deprivation on the part of the voters to vote for 15 directors (because of a reserved permanent seat for GCHS). Hence, notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed. The school requested the chairman of the election committee to change the notice of election claiming that it

was in violation of the 1975 by-laws and unlawfully deprived Grace Christian High School of its vested right to a permanent seat in the board. The GVA denied their request. The school brought suit for mandamus in the HIGC. The association, on the other hand, sought the opinion of the SEC on the validity of this provision and rendered that the practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation Code. The case was set for hearing and HIGC rendered a decision dismissing the school's action. The appeals board of the HIGC affirmed the decision of the hearing officer. Petitioner appealed to the CA but again lost. ISSUE: WON the amendments made in the by-laws in 1975 was valid. HELD: NO. A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Hence, the school cannot claim a vested right to sit in the board on the basis of "practice." Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is the school's claim that its right is "coterminus with the existence of the association." Thomson vs. CA G.R. No. 116631; October 28, 1998

∞ compiled/edited/digest: KWYB

- 18 -

FACTS: Petitioner was the EVP and later on the Management Consultant of the private respondent, American Chamber of Commerce in the Philippines (AmCham). While petitioner was still working with private respondent, his superior, Burridge, retired as AmCham's President. Burridge wanted to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for the share but had it listed in petitioner's name. Upon his admission as a new member of the MPC, petitioner paid the transfer fee from his own funds; but private respondent subsequently reimbursed this amount. Thereafter, MPC issued Proprietary Membership Certificate but petitioner failed to execute a document recognizing private respondent's beneficial ownership over said share. When petitioner's contract of employment was up for renewal, he notified private respondent that he would no longer be available as EVP, but the latter insisted that he stay for 6 months. Petitioner indicated his acceptance of the consultancy arrangement with a counter-proposal among others is the retention of the Polo Club share. Private respondent rejected the counter-proposal. Pending the negotiation for consultancy arrangement, private respondent executed a release and quitclaim against petitioner. Private respondent sent a letter to the petitioner demanding the return and delivery of the MPC share but failed to get a response. Hence, the former filed a complaint against petitioner for the return of MPC share. The trial court awarded the MPC share to petitioner on the ground that the AOI and By-laws of Manila Polo Club prohibit artificial persons, such as corporations, to be club members. CA reversed the decision of the trial court. ISSUE: the WON the CA erred in ordering petitioner to transfer contested MPC share to a nominee of private

respondent notwithstanding MPC’s prohibition for being a club member. HELD:

AOI

and

By-laws

NO. Private respondent does not insist nor intend to transfer the club membership in its name but rather to its designated nominee. The Manila Polo Club does not necessarily prohibit the transfer of proprietary shares by its members. The Club only restricts membership to deserving applicants in accordance with its rules, when the amended Articles of Incorporation states that: "No transfer shall be valid except between the parties, and shall be registered in the Membership Book unless made in accordance with these Articles and the By-Laws". Thus, as between parties herein, there is no question that a transfer is feasible. Moreover, authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. In this case, the petitioner was the nominee of the private respondent to hold the share and enjoy the privileges of the club. But upon the expiration of petitioner's employment as officer and consultant of AmCham, the incentives that go with the position, including use of the MPC share, also ceased to exist. It now behooves petitioner to surrender said share to private respondent's next nominee, another natural person. Salafranca vs. Philamlife (Pamplona) Association G.R. No. 121791; December 23, 1998 Homeowners

FACTS: Petitioner Enrique Salafranca started working with private respondent as administrative officer for a period of 6 months. He was re-appointed to his position three more
∞ compiled/edited/digest: KWYB - 19 -

times. After petitioner’s term of employment expired on, he still continued to work in the same capacity, albeit, without the benefit of a renewed contract. Sometime in 1987, private respondent decided to amend its by-laws. Included therein was a provision regarding officers, specifically, the position of administrative officer under which said officer shall hold office at the pleasure of the Board of Directors. In view of the development, private respondent informed the petitioner that his term of office shall be coterminus with the Board of Directors which appointed him to his position. Furthermore, until he submits a medical certificate his employment shall be on a month to month basis. Notwithstanding the failure of petitioner to submit his medical certificate, he continued to work until his termination. Petitioner filed a complaint for illegal dismissal, money claims and for damages. The Labor Arbiter rendered decision in favor of petitioner on the ground that the amendment would not be applicable to complainant who had become a regular employee long time before the amendment took place. The NLRC reversed the decision of the Labor Arbiter. ISSUE: WON the dismissal of petitioner was valid by virtue of the amendment in the by-laws making petitioner’s position co-terminus with that of the BOD. HELD: NO. Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, however such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the

position shall cease to exist upon occurrence of a specified event. If private respondent wanted to make the petitioner’s position co-terminus with that of the Board of Directors, then the amendment must be effective after petitioner’s stay with the private respondent, not during his term. Obviously, the measure taken by the private respondent in amending its by-laws is nothing but a devious, but crude, attempt to circumvent petitioner’s right to security of tenure as a regular employee guaranteed under the Labor Code. China Banking Corp. vs. CA G.R. No. 117604; March 26, 1997 FACTS: Galicano Calapatia, stockholder of Valley Golf and Country Club Inc. (VGCCI), pledged his stock certificate to petitioner as a security for the loan. Petitioner requested VGCCI that the pledge agreement be recorded in their books. Due to Calapatia failure to pay, petitioner filed a petition for extrajudicial foreclosure of pledged stock; notified and ordered VGCCI to transfer the pledged stock in its name and in the corporate books. VGCCI refused in view of Calapatia’s unsettled accounts with the club. Despite the refusal, the foreclosure ensued and petitioner emerged the highest bidder and a certificate of sale was issued. Meanwhile, VGCCI sent a notice of demand to Calapatia for the full payment of his overdue account. For failure to pay, the delinquent stock was published and auctioned. Petitioner advised VGCCI that it is the new owner of Calapatia’s stock certificate and requested that a new certificate of stock be issued in its name. VGCCI replied that by reason of delinquency, Calapatia’s stock was sold at public auction. Petitioner protested the sale and filed a complaint for the nullification of auction made by VGCCI in the RTC of Makati. The trial court dismissed the complaint on the ground of intra-corporate controversy.
∞ compiled/edited/digest: KWYB - 20 -

Thereafter, petitioner filed a complaint in SEC on the same grounds. SEC ruled in favor of VGCCI. Petitioner appealed to SEC en banc and the latter reversed the decision. VGCCI appealed to CA and the latter set aside the orders of SEC on the ground of lack of jurisdiction because it does not involve intra-corporate controversy. ISSUE: WON the petitioner is bound by the VGCCI’s by-laws. HELD: NO. In order to be bound, the third party must have acquired knowledge, either actual or constructive, of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law.

X. CAPITAL STRUCTURE OF CORPORATIONS Republic Planters Bank vs. Agana G.R. No. 51765; March 3, 1997 FACTS: Private respondent Robes Francisco Realty & Development Corp. secured a loan from petitioner. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent corporation. In other words, instead of giving the legal tender totalling to the full amount of the loan, petitioner lent such amount partially in the form of money and of stock certificates. Said stock certificates were in the name of private respondent Adalia Robes and Carlos Robes, later on, subsequently endorsed his shares in favor of Adalia Robes. Said certificates of stock bear the following terms and conditions: (1) the right to receive a quarterly dividend of 1%, cumulative and participating; (2) that such preferred shares may be redeemed, by the system of drawing lots, at any time after 2 years from the date of issue at the option of the corporation. Private respondents proceeded against petitioner and filed a complaint anchored on private respondents’ alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. The trial court ordered the petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest. Hence this petition. ISSUE: WON the bank can be compelled to redeem the preferred shares issued to RFRDC and Robes.
∞ compiled/edited/digest: KWYB - 21 -

HELD: NO. While the stock certificate does allow redemption, the option to do so was clearly vested in the bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. The redemption of said shares cannot be allowed. The Central Bank made a finding that the Bank has been suffering from chronic reserve deficiency, and that such finding resulted in a directive to the President and Acting Chairman of the Board of the bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. NOTE: This case gave a comprehensive overview of the nature of preferred shares and redeemable shares. Preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred

shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. The declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. Redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

∞ compiled/edited/digest: KWYB

- 22 -

COCOFED vs. Republic of the Philippines G.R. No. 177857-58; September 17, 2009 FACTS: COCOFED seeks the Court’s approval of the conversion of Class “A” and Class “B” common shares of San Miguel Corporation (SMC) registered in the names of Coconut Industry Investment Fund and the so-called “14 Holding Companies” (collectively known as “CIIF companies”) into SMC Series 1 Preferred Shares. COCOFED proposes to constitute a trust fund to be known as the “Coconut Industry Trust Fund (CITF) for the Benefit of the Coconut Farmers,” with respondent Republic, acting through the Philippine Coconut Authority (PCA), as trustee. Respondent Republic filed its Comment questioning COCOFED’s personality to seek the Court’s approval of the desired conversion. Respondent Republic also disputes COCOFED’s right to impose and prescribe terms and conditions on the proposed conversion, maintaining that the CIIF SMC common shares are sequestered assets and are in custodia legis under PCGG’s administration. It postulates that, owing to the sequestrated status of the said common shares, only PCGG has the authority to approve the proposed conversion and seek the necessary Court approval. ISSUE: Conversion of Shares. HELD: The court resolved to approve the conversion, taking into account certain circumstances and hard economic realities as discussed below: No doubt shares of stock are not the safest of investments, moored as they are on the ever changing worldwide and local financial conditions. The proposed conversion would provide better protection either to the government or to the eventually declared real stock owners,

depending on the final ruling on the ownership issue. In the event SMC suffers serious financial reverses in the short or long term and seeks insolvency protection, the owners of the preferred shares, being considered creditors, shall have, vis-à-vis common stock shareholders, preference in the corporate assets of the insolvent or dissolved corporation. In the case of the SMC Series 1 Preferred Shares, these preferential features are made available to buyers of said shares and are amply protected in the investment. The redemption value of the preferred shares depends upon and is actually tied up with the issue price plus all the cumulated and unpaid dividends. This redemption feature is envisaged to effectively eliminate the market volatility risks on the side of the share owners. Undoubtedly, these are clear advantages and benefits that inure to the share owners who, on one hand, prefer a stable dividend yield on their investments and, on the other hand, want security from the uncertainty of market forces over which they do not have control. The proposed conversion will address the concerns and allay the fears of well meaning sectors, and insulate and protect the sequestered CIIF SMC shares from potential damage or loss. Moreover, the conversion may be viewed as a sound business strategy to preserve and conserve the value of the government’s interests in CIIF SMC shares. Preservation is attained by fixing the value today at a significant premium over the market price and ensuring that such value is not going to decline despite negative market conditions. Conservation is realized thru an improvement in the earnings value via the 8% per annum dividends versus the uncertain and most likely lower dividends on common shares. NOTE: This case discussed the classification of shares, its voting and non-voting rights and instances of appraisal right. Treasury stocks was emphasized The common shares after conversion and release from sequestration become treasury stocks or shares. Treasury shares are “shares of stock which have been
∞ compiled/edited/digest: KWYB - 23 -

issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.” A treasury share or stock, which may be common or preferred, may be used for a variety of corporate purposes, such as for a stock bonus plan for management and employees or for acquiring another company. It may be held indefinitely, resold or retired. While held in the company’s treasury, the stock earns no dividends and has no vote in company affairs. F. STOCKS & STOCKHOLDERS 1.) CONSIDERATION FOR SHARES Garcia vs. Lim Chu Sing G.R. No. L-39427; February 24, 1934 FACTS: Lim Cuan Sy had an account with the Mercantile Bank of China (plaintiff bank) in the form of "trust receipts" guaranteed by Lim Chu Sing (respondent) as surety & with chattel mortgage securities. Lim Cuan Sy failed to comply with his obligations. The plaintiff bank required Lim Chu Sing, as surety, to deliver a promissory note. The plaintiff bank, without the knowledge & consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. The defendant is an owner of shares of stock in the plaintiff bank. Meanwhile, plaintiff bank was subsequently placed under liquidation. The defendant filed a motion for the inclusion of the principal debtor Lim Cuan Sy as party defendant with the CFI-Manila so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. The motion was denied. The proceeds of the sale of the mortgaged chattels together with other payments

made were applied to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to collect. ISSUE: WON it is proper to COMPENSATE the respondents indebtedness to the value of his shares of stock with the Mercantile Bank of China. HELD: NO. A share of stock or the certificate thereof is not indebtedness to the owner nor evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not creditors of the corporation. The capital stock of a corporation is a trust fund to be used more particularly for the security of the creditors of the corporation who presumably deal with it on the credit of its capital. Apodaca vs. NLRC G.R. No. 80039; April 18, 1989 FACTS: Petitioner was employed in respondent corporation. He was persuaded by respondent Mirasol to subscribe to 1,500 shares which he paid partially. Petitioner was appointed President and General Manager of the respondent corporation but later on he resigned. Petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation. Private respondents admitted that there is due to petitioner but this was applied to the unpaid balance of his subscription. Petitioner questioned the set-off alleging that there was no call or notice for the payment of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable.

∞ compiled/edited/digest: KWYB

- 24 -

ISSUE;

(1) Whether or not NLRC has jurisdiction to resolve a claim for non-payment of stock subscriptions to a corporation. (2) If so, whether or not an obligation arising therefrom be offset against a money claim of an employee against the employer. HELD: (1) NLRC has no jurisdiction to determine such intracorporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission (now RTC). (2) No. The unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation. As there was no notice or call for the payment of unpaid subscriptions, the same is not yet due and payable. Even if there was a call for payment, an obligation arising from non-payment of stock subscriptions to a corporation cannot be offset against a money claim of an employee against the employer. National Exchange vs. Dexter G.R. No. L-27872; February 25, 1928 FACTS: Dexter subscribed to 300 shares. The subscription contract provided that the shares will be paid solely from the dividends. Company became insolvent. Assignee in insolvency sued Dexter for the balance. Dexter's defense was that under the contract, payment would come from the

dividends. Without dividends, he cannot be obligated to pay.

ISSUE: WON the stipulation contained in the subscription to the effect that the subscription is payable from the first dividends declared on the shares has the effect of relieving the subscriber from personal liability in an action to recover the value of the shares. HELD: The Court held that the subscription contract was void since it works a fraud on creditors who rely on the theoretical capital of the company (subscribed shares). Under the contract, this theoretical value will never be realized since if there are no dividends, stockholders will not be compelled to pay the balance of their subscriptions. 2.) UNPAID SUBSCRIPTIONS Velasco vs. Poizat G.R. No. L-11528; March 15, 1918 FACTS: Poizat subscribed to 20 shares but only paid for 5. Board made a call for payment through a resolution. Poizat refused to pay. Corporation became insolvent. Assignee in insolvency sued Poizat whose defense was that the call was invalid for lack of publication. ISSUE: WON Poizat is liable to the unpaid subscription. HELD: YES. A stock subscription is subsisting liability from the time the subscription is made, since it requires the
∞ compiled/edited/digest: KWYB - 25 -

subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. The Board call became immaterial when insolvency supervenes, all unpaid subscriptions become at once due and enforceable. Lingayen Gulf Electric vs. Baltazar G.R. No. L-4824; June 30, 1953 FACTS: Company’s president subscribed to shares and paid partially. The Board made a call for payment through a resolution. However, the president refused to pay, prompting the corporation to sue. The defense was that the call was invalid for lack of publication. ISSUE: WON the petitioner company is liable for unpaid subscription despite the lack of publication. HELD: NO. Notice of any call for the payment of unpaid subscription should be made not only personally but also by publication once a week, for four consecutive weeks in some newspapers. In a solvent corporation, there must be a published call for the payment of unpaid subscriptions before payment could be demanded. The ruling in Poizat does not apply since the company here is solvent. No cancellation or release from obligation can be valid without the consent of the stockholder. De Silva vs. Aboitiz

G.R. No. L-19893; March 31, 1923 FACTS: De Silva subscribed to 650 shares and paid for 200. The company notified him that his shares will be declared delinquent and sold in a public auction if he does not pay the balance. De Silva did not pay. The company advertised a notice of delinquency sale. De Silva sought an injunction because the by-laws allegedly provide that unpaid subscriptions will be paid from the dividends allotted to stockholders. ISSUE: WON De Silva is liable despite the provision in the bylaws regarding dividends as payment for unpaid subscriptions. HELD: YES. Although, the by-laws provide that unpaid subscriptions may be paid from such dividends The defendant corporation, through its board of directors, made use of its discretionary power, taking advantage of the first of the two remedies: delinquency sale or specific performance. Settled is the rule that nothing in this act shall prevent the directors from collecting, by action in any court of proper jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs and expenses incurred. Lumanlan vs. Cura G.R. No. L-39861; March 21, 1934 FACTS: Lumanlan had unpaid subscriptions. Company’s receiver sued him for the balance and won. While the case was on appeal, the company and petitioner entered into a compromise whereby he would directly pay a creditor of the
∞ compiled/edited/digest: KWYB - 26 -

company. In exchange, the company would forego whatever balance remained on the unpaid subscription. He agreed since he would be paying less than his unpaid subscription. Afterwards, the corporation still sued him for the balance because the company still has unpaid creditors. His defense was the compromise agreement. ISSUE: WON Lumanlan is still liable despite the compromise agreement.

of Membership Certificate No. 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply. 3.) RIGHTS OF UNPAID SHARES NOTE: The three cases thereunder are correlated, read and comprehend thoroughly. Fua Cun vs. Summers G.R. No. L-19441; March 27, 1923

HELD: YES. The Court held that the agreement cannot prejudice creditors. The subscriptions constitute a fund to which they have a right to look to for satisfaction of their claims. Therefore, the corporation has a right to collect all unpaid stock subscriptions and any other amounts which may be due it, notwithstanding the compromise agreement. China Banking Corp. vs. CA (supra) G.R. No. 117604; March 26, 1997 ISSUE: Unpaid Claim with regards to unpaid subscription. HELD: Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction.” In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance FACTS: Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00, paying the sum of P25,000.00, 50% of the subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to secure a promissory note for the sum of P25,000.00. In the meantime, Chua Soco's interest in the 500 shares were attached and levied upon to satisfy his debt with China Banking Corp. Fua Cun brought an action to have himself declared to hold priority over the claim of China Bank, to have the receipt for the shares delivered to him, and to be awarded damages for wrongful attachment, on the ground that he was owner of 250 shares by virtue of Chua Soco's payment of half of the subscription price. ISSUE: WON petitioner is entitled to issuance of stock certificate. HELD: NO. A subscriber does not become the owner of a particular number of shares corresponding to the amount he already paid but merely holds a right of equity in the total number of shares subscribed. Complete ownership over the
∞ compiled/edited/digest: KWYB - 27 -

total number of shares subscribed will only vest with the stockholder upon payment of the whole subscription price. In the absence of special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price become entitled to the issuance of certificates for one-half of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price. Baltazar vs. Lingayen Gulf G.R. No. L-16236; June 30, 1965 FACTS: Baltazar, et al. subscribed to a certain number of shares of Lingayen Gulf Electric Power. They had made only partial payment of the subscription but the corporation issued them certificates corresponding to shares covered by the partial payments. Corporation wanted to deny voting rights to all subscribed shares until total subscription is paid. ISSUE: WON petitioner is entitled to issuance of stock certificate. HELD: YES. The Court held that shares of stock covered by fully paid capital stock shares certificates are entitled to vote. Where the corporation has issued certificate of stock of a definite number corresponding to the initial payment made on the subscription, said shares may validly be voted at all meetings and only the remaining number of shares in the unpaid subscription will be affected by the call and subsequent declaration of delinquency in case of nonpayment of the subscription balance. Corporation may choose to apply payments to subscription either as: (a) full payment for corresponding

number of stock the par value of which is covered by such payment; or (b) as payment pro-rata to each subscribed share. The corporation chose the first option, and, having done so, it cannot unilaterally nullify the certificates issued. Nava vs. Peers Marketing Corp. G.R. No. L-28120; November 25, 1976 FACTS: Teofilo Co subscribed to 80 shares of Peers Marketing Corp. at P100.00 a share for a total of P8,000.00. He, however, paid only P2,000.00 corresponding to 20 shares or 25% of total subscription. Nava bought 20 shares from Co and sought its transfer in the books of the corporation. The corporation refused to transfer said shares in its books. ISSUE: WON the shares may be transferred in the books of the corporation and may stock certificate be issued. HELD:

NO. It was held that the transfer is effective only between Co and Nava and does not affect the corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because, unlike in Lingayen Gulf, no certificate of stock was issued to Co. No shares of stock against which the corporation holds an unpaid claim are transferable in the books of the corporation. Mandamus will not lie to compel corporate officers to record the transfer of shares in its books where no shares of stocks were issued for the unpaid subscription. The issuance of the certificate of stock, its indorsement and delivery to the transferee, and the surrender thereof to the corporation are requisites for the recording of the transfer in the corporate books.

∞ compiled/edited/digest: KWYB

- 28 -

CAMPOS NOTES: The Nava case reinforced the ruling in the Fua Cun case, making it clear that the decision in Lingayen Gulf case should be applicable only to the special circumstances appearing there. Section 64 of the Code clearly supports the Fua Cun case and its prohibitory language seems to rule out an agreement contrary to its provisions. The rule applies to par and no par stocks leaving no room for the application of the Lingayen Gulf case. 4.) NATURE & FUNCTION OF STOCK CERTIFICATES Tan vs. SEC G.R. No. 95696; March 3, 1992 FACTS: Petitioner is the incorporator of the respondent corporation. Stock Certificate No. 2 was given to him as evidenced of his shares. He was elected president and thereafter in order to complete the membership of the five (5) directors in the Board, he sold 50 shares out 400 shares of capital stock to his brother. Stock Certificate No. 2 was cancelled and the corresponding Certificates Nos. 6 and 8 were issued. Petitioner did not endorse and instead kept the cancelled certificate. Later on, petitioner was dislodged from the position and thereafter withdrew from the corporation. Years later, petitioner filed a case against respondent corporation before the Cebu SEC Extension Office, questioning for the first time, the cancellation of his aforesaid Stock Certificates Nos. 2 and 8. The bone of contention raised by the petitioner is that the deprivation of his shares despite the non-endorsement or surrender of his Stock Certificate Nos. 2 and 8, was without the process contrary to the provision of Section 63 of the Corporation Code. ISSUE: Nature and function of stock certificates.

HELD: A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share in stock or the nation of the relation of shareholder to the corporation. A certificate of stock is not a negotiable instrument. "Although it is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well-settled that it is nonnegotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner/s or transferor’s creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel." In the case at bar, a by-law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the President or Board of Directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority to determine in the by-laws the "manner of issuing certificates" of shares of stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of stockholders to transfer their shares. To uphold the cancellation of a stock certification as null and void for lack of delivery of the cancelled "mother" certificate whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the Corporation Code as the only law governing transfer of stocks.

∞ compiled/edited/digest: KWYB

- 29 -

5.) PROOF OF OWNERSHIP OF SHARES Nautica Canning Corp. vs. Yumul G.R. No. 164588; October 19, 2005 FACTS: Yumul was appointed Chief Operating Officer/General Manager of Nautica. First Dominion Prime Holdings, Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up to 15% of the total stocks it subscribed from Nautica. A Deed of Trust and Assignment was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. After Yumul’s resignation from Nautica, he wrote a letter to Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica and demanding the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee denied the request claiming that Yumul was not a stockholder of Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books and records. Yumul’s requests were denied. Yumul filed a petition for mandamus praying that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks corresponding thereto be issued in his name. ISSUE: WON Yumul is a stockholder. (Proof of Ownership of Shares) HELD: YES. Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not affected when such individual gives nominal ownership of only one share of stock to each of the other four

incorporators. This is not necessarily illegal. But, this is valid only between or among the incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest. A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Lao vs. Lao G.R. No. 170585; October 6, 2008 FACTS: Petitioners David and Jose Lao filed a petition with the SEC against respondent Dionisio Lao, president of Pacific Foundry Shop Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed to examine the corporate books of PFSC. Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet filed with the SEC, in which they are named as stockholders and directors of the corporation. David Lao acquired his shares from his father and Jose Lao from respondent himself. Respondent denied petitioners' claim. He also claimed that petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or transfer.
∞ compiled/edited/digest: KWYB - 30 -

Meanwhile, R.A. 8799, otherwise known as the Securities Regulation Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC. RTC denied their petition on the ground that they have no stock certificates in their names. ISSUE: Is the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient proof that one is a shareholder in such corporation? HELD: NO. The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company. The information in the document will still have to be correlated with the corporate books of PFSC. A certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. 6.) RESTRICTIONS ON TRANSFER OF SHARES Fleischer vs. Botica Nolasco (supra) G.R. No. L-23241; March 14, 1925 ISSUE: Is a by-law restricting a transfer of shares valid? HELD: As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land.

Under a statute authorizing by-laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporation books and cannot justify an restriction upon the right of sale. Moreover, a by-law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the President or Board of Directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. The only restraint imposed by the Corporation Law upon transfer of shares is found in Section 35 of Act No. 1459 (now Section 63): "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. Thomson vs. CA (supra) G.R. No. 116631; October 28, 1998 ISSUE: Restrictions on Transfer of Shares. HELD: The Manila Polo Club does not necessarily prohibit the transfer of proprietary shares by its members. The Club only restricts membership to deserving applicants in accordance with its rules, when the amended Articles of Incorporation states that: "No transfer shall be valid except between the parties, and shall be registered in the
∞ compiled/edited/digest: KWYB - 31 -

Membership Book unless made in accordance with these Articles and the By-Laws". Thus, as between parties herein, there is no question that a transfer is feasible. Moreover, authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer.

that upon the death of Clemente Guerrero, his shares of stock became the property of his estate, and his property and that of his widow should first be settled and liquidated in accordance with law before any distribution can be effected so that petitioners may not be a party to any scheme to evade payment of estate or inheritance tax and in order to avoid liability to any third persons or creditors. SEC granted the writ of mandamus. SEC en banc and CA likewise affirmed the decision of SEC. ISSUES: (1) WON SEC has jurisdiction. (2) Restrictions on Transfer of Shares.

Rural Bank of Salinas Inc. vs. CA G.R. No. 96674; June 26, 1992 FACTS: Clemente Guerrero, President of the petitioner-bank, executed a SPA in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise dispose of and/or mortgage his 473 shares of stock of the Bank registered in his name. First deed of assignment was made on the 472 out of 473 shares, in favor of private respondents Luz Andico, Wilhelmina Rosales and Francisco Guerrero, Jr. Months later, second deed of assignment was executed for the remaining one share of stock in favor of private respondent Francisco Guerrero, Sr. Subsequently, private respondent Melania Guerrero presented to petitioner-bank the two Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of the shares of stock so assigned, the cancellation of stock certificates and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners thereof. However, petitioner-bank denied the request. Private respondent filed a mandamus against petitioner-bank in the SEC. The latter alleged in their answer

HELD:

(1) YES. Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies. An intra-corporate controversy has been defined as one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to adjudicate. (2) Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private respondent's names. Such ruling finds support under Section 63 of the Corporation Code. The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred, which is absent here. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers. Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the
∞ compiled/edited/digest: KWYB - 32 -

charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. 7.) VALIDITY OF TRANSFERS/ REGISTRATION OF SHARES Razon vs. IAC G.R. No. 74306; March 16, 1992 FACTS: Petitions centers on the ownership of 1,500 shares of stock in E. Razon, Inc. covered by Stock Certificate No. 003 issued and registered under the name of Juan T. Chuidian in the books of the corporation. The then Court of First Instance of Manila, now Regional Trial Court of Manila, declared that Enrique Razon, the petitioner is the owner of the said shares of stock. The then Intermediate Appellate Court, now Court of Appeals, however, reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased father of petitioner Vicente B. Chuidian is the owner of the shares of stock. Both parties filed separate motions for reconsideration. Enrique Razon wanted the appellate court's decision reversed and the trial court's decision affirmed while Vicente Chuidian asked that all cash and stock dividends and all the pre-emptive rights accruing to the 1,500 shares of stock be ordered delivered to him. The appellate court denied both motions. Hence, these petitions. ISSUE: stock? HELD: When there is an effective transfer of shares of

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Torres vs. CA G.R. No. 120138; September 5, 1997 FACTS: The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of Tormil Realty & Development Corporation while private respondents who are the children of Judge Torres, deceased brother Antonio A. Torres, constituted the minority stockholders. The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled in compliance with the provisions of its by-laws. Judge Torres assigned from his own shares, one (1) share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of qualifying shares, for the sole purpose of meeting the legal requirement to be able to elect them (Tobias and company) to the Board of Directors as Torres nominees. The annual stockholders meeting was held as scheduled. Two representatives of the SEC were present in
∞ compiled/edited/digest: KWYB - 33 -

the meeting. Antonio Torres Jr. questioned the presence of the SEC representatives holding that the subject meeting is for the family corporation and private firm. The SEC representatives explained that it was merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction over all registered corporations. The meeting resulted into chaos which in effect ousted Manuel Torres and his group but nevertheless were able to elect the officers. Consequently, private respondents instituted a complaint with the SEC praying in the main, that the election of petitioners to the Board of Directors be annulled. Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders right of pre-emption as provided in the corporation’s articles and by-laws. ISSUE: WON the assignment of shares made by Judge Torres is valid despite being only the signatory to the certificates issued. HELD: NO. It is the corporate secretary’s duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance. In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein. In the case at bar, the stock and transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of the Board of Directors of TORMIL. In contravention to the above cited provision, the stock and transfer book was not kept at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any valid effect. Where the entries made are not valid, Pabalan and Co. cannot therefore be considered stockholders of record of TORMIL. Because they are not stockholders, they cannot therefore be elected as directors of TORMIL. Rivera vs. Florendo G.R. No. L-57586; October 8, 1986 FACTS: Isamu Akasako, a Japanese national who was allegedly the real owner of the shares of stock in the name of one Aquilino Rivera, a registered stockholder of Fujuyama Hotel and Restaurant, Inc., sold 2,550 shares of the same to Milagros Tsuchiya along with the assurance that Tsuchiya would be made President of the corporation after the purchase. Rivera assured her that he would sign the stock certificates because Akasako was the real owner. However, after the sale was consummated and the consideration paid, Rivera refused to make the indorsement unless he is also paid. Tsuchiya, et al. attempted several times to have the shares registered but were refused compliance by the corp. They filed a special action for mandamus and damages. ISSUES: WON Rivera had the right to refuse the indorsement of the shares of stock in question. WON the Corporation had the right to refuse the registration of the respondents shares. HELD: The Supreme Court denied the writ of preliminary mandatory injunction and remanded the case to the lower court for a trial on the merits. As found in Sec. 63 of the
∞ compiled/edited/digest: KWYB - 34 -

Corporation Code, shares of stock may be transferred by delivery of the certificate after indorsement by the owner or his attorney-in-fact or other person legally authorized to make the transfer. By this provision it is evident that Rivera’s indorsement must be obtained before any transfer of the questioned shares is effected. On the matter of jurisdiction, the SEC does not have jurisdiction of the case since the dispute is not an intracorporate controversy. What it simply involves is a conflict on the ownership of a group of shares between the registered owner and an outside party. Hence, because of this conflict in ownership rights, a mandatory injunction can not lie. Lim Tay vs. CA G.R. No. 126891; August 5, 1998 FACTS: Sy Guiok and Sy Lim secured a loan from Lim Tay. This was secured by a contract of pledge whereby the former pledged their 300 shares of stock each in Go Fay & Company to the latter. However, they failed to pay their respective loans. Hence, Lim Tay filed a petition for mandamus against Go Fay & Company with the SEC praying that an order be issued directing the corporate secretary of the said corporation to register the stock transfers and issue new certificates in favor of Lim Tay. Go Fay & Company filed its answer contending that SEC had no jurisdiction to entertain the complaint on the ground that since Lim Tay was not a stockholder of the company, no intra corporate controversy took place; and furthermore, that the default of payment of Sy Guiok and Sy Lim did not automatically vest in Lim Tay the ownership of the pledged shares. SEC dismissed the complaint. On appeal to the CA, it affirmed SEC’s decision. ISSUE:

WON Lim Tay is the owner of the shares previously subjected to pledge, for him to cause the registration of said shares in his own name. HELD: Lim Tay's ownership over the shares was not yet perfected when the Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged. When shares of stocks are pledged by means of endorsement in blank and delivery of the covering certificates to secure a mortgage loan, the pledgee does not become the owner of the shares simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. A contract of pledge of shares does not make the pledgee the owners of the shares pledged. Ponce vs. Alsons Cement G.R. No. 139802; December 10, 2002 FACTS: Vicente C. Ponce and Fausto Gaid, incorporator of Victory Cement Corporation (VCC), executed a “Deed of Undertaking” and “Indorsement” whereby Gaid acknowledges that Ponce is the owner of the shares and he was therefore assigning/endorsing it to Ponce. VCC was renamed Floro Cement Corporation (FCC) and then to Alsons Cement Corporation (ACC). Up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. Despite repeated demands, the ACC refused to issue the certificates of stocks. Ponce, filed a complaint with the SEC for mandamus and damages against Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. ACC and Giron
∞ compiled/edited/digest: KWYB - 35 -

moved to dismiss. SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss. Ponce appealed the Order of dismissal. The Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need not be registered first before it can take cognizance of the case to enforce Ponce's rights as a stockholder, the Commission En Banc cited the Supreme Court's ruling in Abejo vs. De la Cruz. ACC and Giron appealed the decision of the SEC En Banc to CA. The latter ruled that mandamus should be dismissed for failure to state a cause of action. ISSUE: WON the certificate of stocks of Gaid can be transferred to Ponce. HELD: NO. Pursuant to Section 63 of the Corporation Code, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. The stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is

under no specific legal duty to issue stock certificates in the transferee's name. Even if a certificate is indorsed and delivered to a third person it does not automatically entitle such person to register such certificate in his name, or compel the corporation to register the certificate in his name even. An indorsed and delivered certificate does not create a clear right with respect to the possession of such certificate by the third person, as the same mode (indorsement and delivery) applies to sale, pledge and mortgage. This is where the registered owner must come in; he must inform the corporation whether the disposition was a pledge, or mortgage or sale, which would determine whether or not the third person is entitled registration. Since almost all dealings comprise of the same mode, the owner must apprise the corporation with the necessary information and instructions.

Rural Bank of Salinas Inc. vs. CA (supra) G.R. No. 96674; June 26, 1992 ISSUE: WON the corporate secretary is compelled to register the said transfer of shares. HELD: YES. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus, whenever a corporation refuses to transfer and register stock, mandamus will lie to
∞ compiled/edited/digest: KWYB - 36 -

compel the officers of the corporation to transfer said stock in the books of the corporation. This is because the corporation's obligation to register is ministerial. (Note, however, that in such cases, the person requesting the registration must be the prima facie owner of the shares. Cf. Lim Tay v. CA, 293 SCRA 634) Hager vs. Bryan G.R. No. 6230; January 18, 1911 FACTS: Petitioner filed an original action to secure a writ of mandamus against the respondent, to compel him, as secretary of the Visayan Electric Company, to transfer upon the books of the company certain shares of stock. He based the urgency of his action on a supposed agreement to sell the said shares to a Mr. Levering. Furthermore, he also stated that the issuing company holds no unpaid claims against the shares of stock. However, on the books of the company, it turns out that petitioner is not the registered owner of the stock which he seeks to have transferred. His only claim as owner is based on his averment that such were “indorsed” to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company. There was no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer which petitioner seeks to have made through the medium of the mandamus of this court. ISSUE: WON a writ of mandamus will lie under the circumstances of the case to allow the transfer of shares as being requested by the petitioner. HELD:

The Supreme Court denied the writ. Petitioner did not have the right to demand the transfer since he was not the stockholder of record. This was proven by the fact that the said shares were still registered under the name of Bryan-Landon Company. Furthermore, even the latter did not demand from the company the transfer of said shares. Neither did it give by way of a special power of attorney to petitioner the authority to effect such a transfer. Hence, there is no clear and legal obligation upon the respondent that will justify the issuance of a writ to compel the latter to perform a transfer. As a general rule, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. Bitong vs. CA G.R. No. 123553; July 13, 1998 FACTS: Bitong was the treasurer and member of the BOD of Mr. & Mrs. Publishing Co. She filed a complaint with the SEC to hold respondent spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of the corporation to the prejudice of the stockholders. She alleges that certain transactions entered into by the corporation were not supported by any stockholder’s resolution. The complaint sought to enjoin Apostol from further acting as president-director of the corporation and from disbursing any money or funds. Apostol contends that Bitong was merely a holder-in-trust of the JAKA shares of the
∞ compiled/edited/digest: KWYB - 37 -

corporation, hence, not entitled to the relief she prays for. SEC Hearing Panel issued a writ enjoining Apostol. After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the complaint filed by Bitong. Bitong appealed to the SEC en banc which the latter reversed SEC Hearing Panel decision. Apostol filed petition for review with the CA. CA reversed SEC en banc ruling holding that Bitong was not the owner of any share of stock in the corporation and therefore, not a real party in interest to prosecute the complaint. ISSUE: WON Bitong is the real party-in-interest. HELD: NO. Based on the evidence presented, it could be gleaned that Bitong was not a bona fide stockholder of the corporation. Several corporate documents disclose that the true party in interest was JAKA. Section 63 of the Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. First, the certificate must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership is a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Second, delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company. Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder.

Stock issued without authority and in violation of law is void and confers no rights on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to question its validity since an estoppel cannot operate to create stock which under the law cannot have existence. Abejo vs. De la Cruz G.R. No. L-63558; May 19, 1987 FACTS: Case involves a dispute between the principal stockholders of the corporation Pocket Bell Philippines, Inc. (Pocket Bell) namely spouses Abejos’ and the purchaser, Telectronic Systems, Inc. (Telectronics) of their minority shareholdings and of shares registered in the name of spouses Bragas’. With the said purchases, Telectronics would become the majority stockholder, holding 56% of the outstanding stock and voting power of the corporation Pocket Bell. Telectronics requested the corporate secretary of the corporation, Norberto Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. The latter refused to register the aforesaid transfer of shares in the corporate books, asserting that the Bragas claim pre-emptive rights over the Abejo shares and that Virginia Braga never transferred her shares to Telectronics but had lost the five stock certificates representing those shares. This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the SEC, while the Abejos and
∞ compiled/edited/digest: KWYB - 38 -

Telectronics, as new majority shareholders, claim the contrary. Respondent Judge de la Cruz issued an order rescinding the order which dismissed the complaint of the Bragas in the RTC, thus holding that the RTC and not the SEC had jurisdiction. Respondent judge also revived the TRO previously issued restraining Telectronics' agents or representatives from enforcing their resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the corporation and discharging their functions. The Abejos filed a MR, which motion was duly opposed by the Bragas, which was denied by respondent Judge. ISSUE: (1) Who has jurisdiction? (2) WON the corporate secretary may refuse to register the transfer of shares in the corporate books. HELD: (1) The Court ruled that the SEC has original and exclusive jurisdiction and that the SEC correctly ruled in dismissing the Bragas' petition questioning its jurisdiction, that "the issue is not the ownership of shares but rather the non-performance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary." The dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary, backed up by his parents as erstwhile majority shareholders, to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the purchaser thereof. (2) NO. As pointed out by the Abejos, Pocket Bell is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the bylaws and the certificates of

stock themselves, as required by law for the enforcement of such restriction. As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder." This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. 8.) UNAUTHORIZED TRANSFERS Santamaria vs. Hongkong and Shanghai Bank G.R. No. L-2808; August 31, 1951 FACTS: Santamaria secured her order for a number of shares with RJ Campos & Co. with her stock certificate representing her shares with Batangas Minerals. The said certificate was originally issued in the name of her broker and endorsed in blank by the latter. As Campos failed to make good on the order, Santamaria demanded the return of the certificate. However, she was informed that Hongkong Bank had acquired possession of it inasmuch as it was covered by the pledge made by Campos with the bank. Thereafter, she instituted an action against Hongkong Bank for the recovery of the certificate. Trial court decided in her favor. The bank appealed. ISSUES: (1) WON Santamaria was chargeable with negligence which gave rise to the case. (2) WON the Bank was obligated to inquire into the ownership of the certificate.

∞ compiled/edited/digest: KWYB

- 39 -

HELD:

(1) The facts of the case justify the conclusion that she was negligent. She delivered the certificate, which was endorsed in blank, to Campos without having taken any precaution. She did not ask the Batangas Minerals to cancel it and instead, issue another in her name. In failing to do so, she clothed Campos with apparent title to the shares represented by the certificate. By her misplaced confidence in Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it is wellsettled that “where one of the innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer.” (2) The subject certificate is what is known as a street certificate. Upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. The bank is not obligated to look beyond the certificate to ascertain the ownership of the stock. A certificate of stock, endorsed in blank, is deemed quasinegotiable, and as such, the transferee thereof is justified in believing that it belongs to the transferor. De los Santos vs. McGrath G.R. No. L-4818; February 28, 1955 FACTS: De los Santos filed a claim with the Alien Property Custodian for a number of shares of the Lepanto Corporation. He contended that said shares were bought from one Campos and Hess, both of them dead. The Philippine Alien Property Administrator rejected the claim. He instituted the present action to establish title to the aforementioned shares of stock. The US Attorney General, the successor of the Alien Property Administrator, opposed the action on the ground that the said shares of stock were bought by one Madrigal, in trust for the true owner, Matsui, and then delivered to the latter indorsed in blank.

ISSUE: stock? HELD: De los Santos’ sole evidence that he purchased the said shares was his own unverified testimony. The alleged vendors of the shares of stock, who could have verified the allegation, were already dead. Further, the receipt that might have proven the sale was said to have been lost in a fire. On the other hand, it was shown that the shares of stock were registered in the records of Lepanto in the name of Madrigal, the trustee of Matsui; that Matsui was subsequently given possession of the corresponding stock certificates, though endorsed in blank; and, that Matsui had neither sold, conveyed nor alienated these to anybody. It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no title is acquired by an innocent purchaser of value. This is so because even though a stock certificate is regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, the holder thereof takes it without prejudice to such rights or defenses as the registered owner or credit may have under the law, except in so far as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. COMPARISON of Santamaria case and De los Santos case: In Santamaria case, a certificate of stock, indorsed in blank, is deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. In De los Santos case, although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery it is well settled that the instrument is nonnegotiable, because the holder thereof takes it without prejudice to such rights or defense as the registered owner
∞ compiled/edited/digest: KWYB - 40 -

Had de los Santos in fact purchased the shares of

or credit may have under the law, except in so far as such rights or defenses are subject tot eh limitations imposed by the principles governing estoppel. 9.) COLLATERAL TRANSFERS Uson vs. Diosomito G.R. No. L-42135; June 17, 1935 FACTS: Toribia Uson filed a civil action for debt against Vicente Diosomito. Upon institution of said action, an attachment was duly issued and respondent’s property was levied upon, including 75 shares of the North Electric Co., which stood in his name on the books of the company when the attachment was levied. The sheriff sold said shares at a public auction with Uson being the highest bidder. Jollye claims to be the owner of said certificate of stock issued to him by the North Electric Co. There is no dispute that Diosomito was the original owner of said shares, which he sold to Barcelon. However, Barcelon did not present these certificates to the corporation for registration until 19 months after the delivery thereof by Barcelon, and 9 months after the attachment and levy on said shares. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in Barcelon's name. ISSUE: Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp., valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not? HELD: NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the defendant Diosomito

as to the defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of stock will still stood in the name of Diosomito on the books of the corp. Sec. 35 provides that “No transfer, however, is valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.” All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers. Chua Guan vs. Samahang Magsasaka G.R. No. L-42091; November 2, 1935 FACTS: A certain Co Toco was the owner of 5,894 shares of Samahang Magsasaka, Inc. which he mortgaged to Chua Chiu to guarantee the payment of debt. The corresponding certificates were delivered to Chua Chiu and were duly registered in the office of the register of deeds of Manila and in the office of the said corporation. About five months after, Chua Chui assigned all his rights and interest in said mortgage to the plaintiff, Chua Gan which was also duly recorded. Co Toco defaulted. The plaintiff foreclosed on the mortgage. In the public auction he won as the highest bidder. However, upon presenting the certificates to the corporation for registration, the officers refused because they and the plaintiff could not agree on the noting of nine other attachments that had been issued, served and noted on the books of the corporation against the shares of Co Toco. ISSUE:
∞ compiled/edited/digest: KWYB - 41 -

WON the said mortgage takes priority over the already noted writs of attachment. HELD: The Supreme Court ruled that the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant. The court argues that the registration in the register of deeds must be done both at the place where the owner is domiciled and at the place where the principal office of the corporation is located. The purpose of this is to give sufficient constructive of any claim or encumbrance over the recorded shares to third persons. Furthermore, any share still standing in the name of the debtor on the books of the corporation will be liable to seizure by attachment or levy on execution at the instance of other creditors. Thus, the game here is to have the highest or most preferred priority over any pledged or mortgaged shares. NOTE: The provision of the Chattel Mortgage Law (Act No. 1508) providing for delivery of mortgaged property to the mortgagee as a mode of constituting a chattel mortgage is no longer valid in view of the Civil Code provision defining such as a pledge. Chemphil Export & Import vs. CA G.R. Nos. 112438-39; December 12, 1995 FACTS: This case involved a consortium of banks which obtained a writ of preliminary attachment in a civil case ("consortium case") over shares of stock belonging to Mr. Antonio Garcia in the Chemical Industries of the Philippines ("Chemphil"). The attachment, which was served on the secretary to the President of Chemphil, was not registered in the stock and transfer book of Chemphil. A few years thereafter, Mr. Garcia sold the same shares of stock to the Ferro Chemicals, Inc. ("FCI"). FCI subsequently assigned the

shares to the Chemphil Export and Import Corporation ("CEIC"). The shares were registered and recorded in the corporate books of Chemphil in CEIC’s name and the corresponding stock certificates were issued to it. The consortium case was appealed to the CA. While the appeal was pending, Mr. Garcia and the bank consortium amicably settled the case. The CA rendered a judgment by compromise. Unfortunately, Mr. Garcia failed to comply with the compromise agreement. The consortium of banks caused to be sold on execution the shares of stock (earlier attached by them), which were the same shares subsequently sold by Mr. Garcia to CEIC. A certificate of sale covering the shares was issued in the name of the bank consortium. ISSUE: Who has priority to the shares of stock – an attaching creditor or the subsequent buyer? HELD: The Supreme Court ruled that the attachment lien acquired by the bank consortium is valid and effective even as against the buyer (FCI) and its assignee (CEIC), notwithstanding the fact that said attachment lien was not registered in the corporate books of Chemphil. "Both the Revised Rules of Court and the Corporation Code", according to the Court, "do not require annotation in the corporation’s stock and transfer book for the attachment of shares of stock to be valid and binding on the corporation and third party." Consequently, when FCI purchased the shares of stock from Mr. Garcia, it purchased them subject to the attachment lien of the bank consortium. In this regard, the High Court explained that a preliminary attachment is a security for the satisfaction of whatever judgment may be obtained by the attaching creditor in a court action, which continues until the judgment debt is fully satisfied. COMPARISON of the abovementioned three cases:
∞ compiled/edited/digest: KWYB - 42 -

Among the three cases mentioned, settled is the rule that the attaching creditor enjoys priority to the shares of stock as against a subsequent lawful buyer. XII. CORPORATE POWERS Republic of the Philippines vs. Acoje Mining Co. G.R. No. L-18062; February 28, 1963 FACTS: Acoje Mining requested to the Director of Posts for opening of a post, telegraph and money order offices at its mining camp. The latter signify its willingness but requested that a board resolution be passed upon regarding assumption of direct responsibility in case of pecuniary loss. The board resolution was approved and thereafter a post office branch was opened. A postmaster was hired to conduct the operations of post office. The postmaster that was hired went on a leave but never returned. The company immediately informed the officials of the Manila Post Office and the provincial auditor of Zambales of postmaster’s disappearance with the result that the accounts of the postmaster were checked and a shortage was found. Several demands were made upon the company for the payment of the shortage, having failed; the petitioner commenced the present action. The company in its answer denied liability contending that the resolution of the board of directors wherein it assumed responsibility for the act of the postmaster is ultra vires, and in any event its liability under said resolution is only that of a guarantor who answers only after the exhaustion of the properties of the principal, aside from the fact that the loss claimed by the plaintiff is not supported by the office record. ISSUE: Is the board resolution for the approval of post office branch ultra vires? HELD:

Resolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns the benefit, convenience, and welfare of the company’s employees and their families. While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. National Power Corp. vs. Vera G.R. No. 83558; February 27, 1989 FACTS: Sea Lion International Port Services, private respondent, filed a complaint for prohibition and mandamus against petitioner NPC alleging that it had acted in bad faith in not renewing its contract for stevedoring services for its plant and in taking over its stevedoring services. Respondent judge issued a restraining order against NPC enjoining the latter from undertaking stevedoring services at its pier. Consequently, NPC filed an "Urgent Motion" to dissolve the restraining order, asserting that respondent judge had no jurisdiction to issue the order and private respondent, whose contract with NPC had expired prior to the commencement of the suit, failed to establish a cause of action for a writ of preliminary injunction. The respondent judge denied the NPC’s motion and issued a TRO after finding that NPC was not empowered by its Charter to engage in stevedoring and arrastre services. ISSUE:
∞ compiled/edited/digest: KWYB - 43 -

WON the undertaking of stevedoring services is empowered by the NPC’s charter powers. HELD: YES. To carry out the national policy of total electrification of the country, the NPC was created and empowered not only to construct, operate and maintain power plants, reservoirs, transmission lines, and other works, but also to exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose. In determining whether or not an NPC act falls within the purview of the above provision, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. Government of Phil. Islands vs. El Hogar Filipino (supra) G.R. No. L-26649; July 13, 1927 NOTE: This case is an example of how the implied powers concept may be used to justify certain acts of a corporation. A quo warranto proceeding instituted by the Government against El Hogar, a building and loan association, to deprive it of its corporate franchise. 1. El Hogar held title to real property for a period in excess of 5 years in good faith; hence this cause will not prosper.

2. El Hogar owned a lot and bldg. at a business district
in Manila allegedly in excess of its reasonable requirements, held valid because, it was found to be necessary and legally acquired and developed. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent stockholders; and managed properties of its stockholders even if such were not mortgaged to them. Held: first two valid, but the third is ultra vires because the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan association. Compensation to the promoter and organizer allegedly excessive and unconscionable. Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its stockholders who may bring a complaint on such. Issuance of special shares did not affect El Hogar's character as a building and loan association nor make its loans usurious. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, because according to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the corp. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid because there is no statute which expressly

3.

4.

5.

6.

7.

8.

∞ compiled/edited/digest: KWYB

- 44 -

declares that loans may be made by these associations solely for the purpose of bldg. homes. 9. Sec. 173 of the Corp. Law provides that "any person" may become a stockholder on a bldg. and loan association. The word "person" is used on a broad sense including not only natural persons but also artificial persons. Pirovano, et. al. vs. De la Rama G.R. No. L-5377; December 29, 1954 FACTS: Enrico Pirovano, president of the defendant company, managed the company until it became a multi-million corporation by the time Pirovano was executed by the Japanese during the occupation. BOD Resolution: Out of the proceeds, the sum of P400,000 be set aside for equal division among the 4 minor children, convertible into shares of stock of the De la Rama Steamship Company, at par and, for that purpose, that the present registered stockholders of the corporation be requested to waive their pre-emptive right to 4,000 shares of the unissued stock of the company in order to enable each of the 4 minor heirs to obtain 1,000 shares at par. Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania Pirovano. They seek to enforce certain resolutions adopted by the Board of Directors and stockholders of the defendant company giving to said minor children of the proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the company as beneficiary. Defendant's main defense is: that said resolutions and the contract executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due and demandable. RTC ruled that contract or donation is not ultra vires. ISSUE:

WON corporation donation of the proceeds of the insurance policies is an ultra vires act. HELD: NO. The AOI of the corporation provided two relevant items: (1) to invest and deal with moneys of the company not immediately required, in such manner as from time to time may be determined; and (2) to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest. From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer. NOTE: Ultra vires act vs. Illegal Acts – A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public policy or public duty, and are, like similar transactions between the individuals void. They cannot serve as basis of a court action, nor require validity ultra vires acts on the other hand, or those which are not illegal and void ab initio, but are merely within are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. Harden, et. al. vs. Benguet G.R. No. L-37331; March 18, 1933 FACTS: A contract between Benguet Consolidated Mining and Balatoc Mining Co. provided that Benguet will bring in capital, equipment. and technical expertise in exchange for
∞ compiled/edited/digest: KWYB - 45 -

capital shares in Balatoc. Harden was a stockholder of Balatoc and he contends that this contract violated the Corporation Law which restricts the acquisition of interest by a mining corporation in another mining corporation. ISSUE: WON the plaintiff can maintain an action based upon the violation of the law supposedly committed by respondent company. HELD: NO. The provision was adopted by the lawmakers with a sole view to the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. but these proceedings can be maintained only by the AttorneyGeneral in representation of the Government. Bissell vs. Michigan Southern 22 NY 258; 1860 FACTS: Two railroad corporations contend that they transcended their own powers and violated their own organic laws. Hence, they should not be held liable for the injury of the plaintiff who was a passenger in one of their trains. ISSUE: WON the contract made between the two railroad corporations is valid and as such can be use a defense to evade the liability against the passenger. HELD:

NO. The contract between the two corporations was an ultra vires act. However, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense. XIII. CONTROL AND MANAGEMENT 1.) BOARD OF DIRECTORS/TRUSTEES Ramirez vs. Orientalist Co. G.R. No. 11897; September 24, 1918 FACTS: Orientalist Co. engaged in the theatre business, desired to be the exclusive agent of Ramirez, who is based in Paris, for two film outfits—Éclair Films and Milano films. Through the active involvement and negotiations of Ramon “El Presidente” Fernandez, a director of Orientalist and also its treasurer, Orientalist was able to secure an offer, the terms of which were acceptable to the Board as well as to the stockholders. It appears that this acceptance of the terms of the offer was decided during an informal meeting of the board, and conveyed to Ramirez in two letters signed only by Fernandez, both in his individual and his capacity as treasurer of Orientalist. It turns out that the company was not financially capable to comply with the obligations set forth in the agency contract, and about this time films had already been delivered to the company. Two stockholders meetings were organized, the first adopted a resolution approving the action of the board on the offer, the second raising the contingency of the lack of funds and the proviso that the four officers involved, including Fernandez would continue importing the films using their own funds. Ramirez sues Orientalist and Fernandez for what is due on the contract. RTC ruled Oriental as the principal debtor while Fernandez is subsidiarily liable.
∞ compiled/edited/digest: KWYB - 46 -

ISSUE: (1) WON the treasurer has an independent authority to bind the respondent company by signing its name to the letters in questioned. (2) Can stockholders ratify the abovementioned contract? HELD: (1) NO. It is declared in section 28 of the Corporation Law that corporate power shall be exercised, and all corporate business conducted by the board of directors; and this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the board of directors. It is true that it is also declared in the same bylaws that the president shall have the power, and it shall be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an independent power to make contract binding on the corporation. (2) NO. The subsequent action by the stockholders in not ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The theory of a corporation is that the stockholders may have all the profits but shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stockholders. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board. Expert Travel & Tours vs. CA G.R. No. 152392; May 26, 2005 FACTS: Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and his law firm. KAL, through appointed counsel, filed a complaint against Expert Travel with the RTC for the collection of sum of money. The verification and certification against forum shopping was signed by the same appointed counsel, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. Expert Travel filed a motion to dismiss the complaint on the ground that the appointed counsel was not authorized to execute the verification and certificate of nonforum shopping as required by the Rules of Court. KAL opposed the motion, contending that he is a resident agent and was registered as such with the SEC as required by the Corporation Code. He also claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during a special meeting, wherein the board of directors conducted a special teleconference which he attended. It was also averred that in the same teleconference, the board of directors approved a resolution authorizing him to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim alleged, however, that the corporation had no written copy of the aforesaid resolution. TC denied motion to dismiss. CA affirms. ISSUE:

∞ compiled/edited/digest: KWYB

- 47 -

Can a special teleconference be recognized as legitimate means to approved a board resolution and authorize an agent to execute an act in favor of the corporation? HELD: YES. In this age of modern technology, the courts may take judicial notice that business transactions may be made by individuals through teleconferencing. teleconferencing and videoconferencing of members of board of directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to such conferences. HOWEVER, in the case at bar, even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along with the respondent’s Board of Directors, the Court is not convinced that one was conducted; even if there had been one, the Court is not inclined to believe that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum shopping. Facts and circumstances show that there was gross failure on the part of company to prove that there was indeed a special teleconference such as failure to produce a written copy of the board resolution via teleconference. NOTE: Read SEC Memo Circular No. 15-2001, the guidelines for the conduct of teleconferencing and videoconferencing. Citibank, N.A. vs. Chua G.R. No. 102300; March 17, 1993 FACTS: Petitioner is a foreign commercial banking corporation duly licensed to do business in the Philippines. Private respondents, spouses Cresencio and Zenaida Velez,

were good clients of petitioner bank's branch in Cebu until when they filed a complaint for specific performance and damages against the former for violation of BP 22 and several count of estafa cases in RTC of Cebu. On the date of pre-trial conference, counsel for petitioner bank appeared, presenting a special power of attorney executed by Citibank officer in favor of petitioner bank's counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar. Inspite of this special power of attorney, counsel for private respondents orally moved to declare petitioner bank as in default on the ground that the special power of attorney was not executed by the Board of Directors of Citibank. Respondent judge denied private respondents' oral motion to declare petitioner bank as in default and set the continuation of the pre-trial conference. The private respondents filed for reconsideration, and this time the respondent holds the petitioner bank in default for failure to have a proper representation. CA affirms. ISSUE: WON a resolution of the board of directors of a corporation is always necessary for granting authority to an agent to represent the corporation in court cases. HELD: In the corporate hierarchy, there are three levels of control: (1) the board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; and (3) the stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation. However, just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it.
∞ compiled/edited/digest: KWYB - 48 -

Although as a general rule, all corporate powers are to be exercised by the board of directors, exceptions are made where the Code provides otherwise under Sec. 25 and 47. It is clear that corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, by-laws or by resolution or other act of the board of directors. In addition, an officer who is not a director may also appoint other agents when so authorized by the by-laws or by the board of directors. Such are referred to as express powers. There are also powers incidental to express powers conferred. It is a fundamental principle in the law of agency that every delegation of authority, whether general or special, carries with it, unless the contrary be expressed, implied authority to do all of those acts, naturally and ordinarily done in such cases, which are reasonably necessary and proper to be done in order to carry into effect the main authority conferred. Since the by-laws are a source of authority for corporate officers and agents of the corporation, a resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind it during the pretrial conference of the case at bar is not necessary because its by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, to execute a power of attorney to a designated bank officer, clothing him with authority to direct and manage corporate affairs. Boyer-Roxas vs. CA G.R. No. 100866; July 14, 1992 FACTS: The corporation, Heirs of Eugenia Roxas Inc, was established to engage in agriculture to develop the properties inherited from Eugenia Roxas and Eufroncio Roxas, which includes the land upon which the Hidden Valley Springs Resort was put up, including various improvements thereon, using corporate funds. The AOI of Heirs Inc. was amended for this purpose. Heirs Inc. claims

that Boyer-Roxas and Guillermo Roxas had been in possession of the various properties and improvements in the resort and only upon the tolerance of the corporation. It was alleged that they committed acts that impeded the corporation’s expansion and normal operation of the resort. They also did not comply with court and regulatory orders, and thus the corporation adopted a resolution authorizing the ejectment of the defendants. TC grants. CA affirms. Boyer and Roxas contend that, being stockholders, their possession of the properties of the corporation must be respected in view of their ownership of an aliquot portion of all properties of the corporation. ISSUE: WON the possession of the properties in question must be respected in view of being a stockholder. HELD: NO. Regarding properties owned by the corporation, under the doctrine of corporate entity “properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members.” While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. The corporation has a personality distinct and separate from its members and transacts business only through its officers or agents. Whatever authority these officers or agents may have is derived from the board or other governing body, unless conferred by the charter of the corporation itself. An officer's power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from
∞ compiled/edited/digest: KWYB - 49 -

the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. In this case the elder Roxas who then controlled the management of the corporation, being the majority stockholder, consented to the petitioner’s use and stay within the properties. The Board did not object and were allowed to stay until it adopted a resolution to the effect of authorizing to eject them. Since their stay was merely by tolerance, in deference to the wishes of the majority stockholder who controlled the corporation, when Roxas died his actions cannot bind the company forever. There is no provision in the by-laws or any other resolution authorizing their continued stay. Valle Verde Country Club vs. Africa G.R. No. 151969; September 4, 2009 FACTS: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa were elected as BOD during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc. (VVCC). Requisite quorum could not be obtained so they continued in a hold-over capacity. First resignation: Dinglasan, BOD still constituting a quorum elected Eric Roxas (Roxas). Second resignation: Makalintal, Jose Ramirez (Ramirez) was elected by the remaining BOD. Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the petitioner’s Board with the SEC and the RTC as contrary to Sec. 23 and 29 of the Corporation Code. He claimed that a year after Makalintal’s election as member of the petitioner’s Board in 1996, his term – as well as those of the other members – should be considered to have already expired. Thus, according to him, the resulting vacancy should have been filled by the stockholders in a regular or

special meeting called for that purpose, and not by the remaining members of the petitioner’s Board. RTC favored respondent. SEC ruled on the same ground as RTC. Petitioner appealed in SC for certiorari being partially contrary to law and jurisprudence. ISSUE: Can the members of a corporation’s board of directors elect another director to fill in a vacancy caused by the resignation of a hold-over director? HELD: NO. The holdover period is not part of the term of office of a member of the board of directors. When Section 23 of the Corporation Code declares that “the board of directors…shall hold office for one (1) year until their successors are elected and qualified,” we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. The powers of the corporation’s board of directors emanate from its stockholders. This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not by the expiration of a member’s term, the successor “so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office.” The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or
∞ compiled/edited/digest: KWYB - 50 -

impair the corporation’s operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve only to the “unexpired term of his predecessor in office.” It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term. NOTE: The court distinguished term and tenure. Term is the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify. Tenure represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. 2.) OFFICERS Yu Chuck vs. Kong Li Po G.R. No. L-22450; December 3, 1924 FACTS: Kong Li Po is a corporation engaged in the publication of a Chinese newspaper. Its AOI provide for a president who shall sign all contracts and other instruments of writing, but does not provide for a business or general manager. CC

Chen or TC Chen was appointed general business manager of the paper. He then entered into an agreement with Yu Chuck for the printing of the newspaper for P580 per month. Yu Chuck worked for a year until they were discharged by the new manager Tan Tian Hong because CC Chen had left for China. Yu Chuck sues the paper, claiming the contract was for a period of 3 years, and that discharge without just cause before the expiration of this term entitles them to receive full pay for the remainder of the term. Kong Li Po counters that CC Chen was not authorized to enter into the contract with Yu Chuck. TC ruled in favor of Yu Chuck, concluding that the contract had been impliedly ratified by Kong Li Po and that although he had no express authority to enter into the contract; since he was general business manager in charge of the printing of the paper he had implied authority to employ the petitioners. ISSUE: WON CC Chen had the power to bind the corporation through the contract mentioned. HELD: The general rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this power may either expressly or impliedly be delegated to other officers or agents of the corporation, and it is well settled that except where the authority of employing servants and agent is expressly vested in the board of directors or trustees, an officer or agent who has general control and management of the corporation's business, or a specific part thereof, may bind the corporation by the employment of such agent and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. In the case at bar, although the court affirmed the power to bind the corporation may be made by an officer or agent, the contract of employment in the printing business

∞ compiled/edited/digest: KWYB

- 51 -

is not reasonable for it was too long and onerous to the business. Woodchild Holdings vs. Roxas Electric G.R. No. 140667; August 12, 2004 FACTS: The respondent was the owner of two parcels of land located along the Sumulong Highway. Petitioner wanted to buy the one parcel on which it planned to construct its warehouse building. Roxas, as the president of respondent company, accepted the offer through the BOD resolution issued by the latter. However, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No.491A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the deed of absolute sale. ISSUE: WON whether the respondent is bound by the provisions in the deed of absolute sale granting to the petitioner beneficial use and a right of way over a portion of Lot No. 491-A-3-B-1 accessing to the Sumulong Highway. HELD: NO. Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation. Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of

the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the adjacent lot, Lot No. 491-A3-B-1, or to create or convey real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner “on such terms and conditions which he deems most reasonable and advantageous.” The general rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally identical with that authorized to be done. In sum, then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it. The doctrine of apparent authority was not applicable in this case because the president of the company was given a specific authority by virtue of a board resolution to sell a particular land. Any actions of the president outside such vested authority shall not bind the corporation with third party. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent. Board of Liquidators vs. Heirs of Kalaw G.R. No. L-18805; August 14, 1967 FACTS: Maximo Kalaw is chairman of the board and general manager of the National Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy sell barter export and deal in coconut, copra, and desiccated coconut. Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of copra. Nature intervened—4 typhoons devastated agriculture and copra production. NACOCO was on the verge of sustaining losses and could not be able to make good on the contracts.
∞ compiled/edited/digest: KWYB - 52 -

Sensing this, Kalaw submitted the contracts to the board for approval and made a full disclosure of the situation. No action was taken, and no vote was taken on the matter. On 20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in attendance, and approved the contracts. NACOCO however only partially performed the contracts. One of the contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-court and paid Drayfus P567,024.52 representing 70% of total claims. The total settlements sum up to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover this sum, alleging negligence, bad faith and breach of trust in approving the contracts, by not having them approved by the board. TC dismisses complaint. NACOCO claims that the by-laws provide that prior board approval is required before the GM can perform or execute in behalf of NACOCO all contracts necessary to accomplish its purpose. ISSUE: WON the Kalaw contracts are valid despite its lack of prior board approval as required by the NACOCO by-laws. HELD: The contracts in question are “forward sales” contracts—a sales agreement entered into, even though the goods are not yet in the hands of the seller. Given the peculiar nature of copra trading, i.e. copra must be disposed of as soon as possible else it would lose weight and would decrease its value, it necessitates a quick turnover and execution of the contract on short notice (w/in 24 hours). It would be difficult if not impractical to call a formal meeting of the board each time a contract is to be executed. Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business

entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO. Ratification by a corporation of an unauthorized act or contract by its officers relates back to the time of the act or contract ratified and is equivalent to original authority. The theory of corporate ratification is predicated upon the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority. Ratification “cleanses the contract from all its defects from the moment it was constituted. Thus, even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held too rigid and inflexible as to fail to recognize equitable considerations.

Matling Industrial vs. Coros G.R. No. 157802; October 13, 2010 FACTS: This case involves the dismissal of Coros who held the position of vice president for finance and administration of the company. He was at the same time a member of its board of directors. Coros filed a complaint for illegal dismissal with the Labor Arbiter. The company sought the dismissal of the case on the ground that, since he is a corporate officer and director, his complaint is an intra-corporate dispute which,
∞ compiled/edited/digest: KWYB - 53 -

at that time, was under the jurisdiction of the Securities and Exchange Commission (now RTC) . The Labor Arbiter, NLRC and CA denied the company’s plea and ruled that Coros is not a corporate officer and therefore his complaint falls within the Labor Arbiter’s jurisdiction. The company elevated the matter to the tribunal for final resolution. The company argued that Coros was appointed to his position by its president pursuant to the authority given to him by the board of directors in its by-laws. On the basis of that grant of power, it was as if Coros was directly appointed by the board, thus making him a corporate officer. Coros countered that inasmuch as his position does not appear in the company’s by-laws and he was not directly appointed by the board, he should be classified as an ordinary or non-corporate officer. ISSUES: WON respondent is a corporate officer? Who is a corporate officer? HELD: NO. Central to the issue is Section 25 of the Corporation Code, which states that “immediately after their election, the directors of a corporation must formally organize by the election of a president, a treasurer, a secretary, and such other officers as may be provided for in the by-laws.” The tribunal stated that for a position to be considered a corporate office, it is essential that it is one of those expressly mentioned in the Corporation Code or in the company’s by-laws. Thus, “the creation of an office pursuant to or under a by-law enabling provision is NOT enough to make a position a corporate office.” The company’s argument that its by-laws made a valid delegation of the board’s appointing power to the president was rejected by the tribunal. It pointed out that the delegation is invalid because the law requires the board itself to elect the corporate officers. That power is “exclusively vested in the board of directors and could not

be delegated to subordinate officers or agents.” Moreover, the tribunal explained, the appointment authority granted to the president was limited to the creation of non-corporate offices to be occupied by ordinary employees. Their appointment is incidental to the president’s duty as executive to assist him in running the company. 3.) BOARD COMMITTEES Hayes vs. Canada Atlantic & Plant Steamship Co. 181 F. 289; 1910 FACTS: Petitioner is one of the executive committee of respondent company. In this case, the Executive Committee: (a) removed the Treasurer and appointed a new one; (b) fixed the annual salary of the members of the Executive Committee; (c) amended the by-laws by giving the President the sole authority to call a stockholder's meeting and a board of directors meeting; and (d) amended the composition of the Executive Committee by limiting it to just 2 persons. ISSUE: HELD: No, because the Executive Committee usurped the powers vested in the board and the stockholders. If their actions were valid, it would put the corporation in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. "Full powers" should be interpreted only in the ordinary conduct of business and not total abdication of board and stockholders' powers to the Executive Committee. "FULL POWERS" does not mean unlimited or absolute power.
∞ compiled/edited/digest: KWYB - 54 -

Were these actions valid?

XIV. DUTIES OF STOCKHOLDERS

DIRECTORS

AND

CONTROLLING

HELD: YES. The Board members and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and act in good faith, do not become liable, civilly or otherwise, for the consequences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred. In this case, the board members obviously wanted to get rid of Cosalan and acted with indecent haste in removing him from his GM position. This shows strong indications that the members of the board had illegally suspended and dismissed him precisely because he was trying to rectify the financial irregularities. The Board members are also liable for damages under Sec. 31 of the Corporation Code, which by virtue of Sec. 4 thereof, makes it applicable in a supplementary manner to all corporations, including those with special or individual charters so long as these are not inconsistent therewith. The Board members are also guilty of gross negligence and bad faith in directing the affairs of the corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their authority. Prime White Cement vs. IAC G.R. No. L-68555; March 19, 1993 FACTS: Prime White Cement entered into a dealership agreement with one of its directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years, and that a letter of credit be opened to secure payment. Te advertised his dealership and was able to obtain possible clients, and entered into
∞ compiled/edited/digest: KWYB - 55 -

Benguet Electric Cooperative vs. NLRC G.R. No. 89070; May 18, 1992 FACTS: Cosalan, GM of the Benguet Electric Cooperative, was informed by COA that cash advances received by officers and employees of Benguet Electric had been virtually written off the books, that per diems and allowances showed substantial inconsistencies with the directives of the National Electrification Administration, and that several irregularities in the utilization of funds released by NEA to Benguet. Cosalan then implemented the remedial measures recommended by COA. Board members of Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary, representation and other allowances, and directed him to hold in abeyance all disciplinary actions, and struck his name out as principal signatory of Benguet Electric. The Board adopted another series of resolutions which resulted in the ouster of Cosalan as GM. Cosalan nonetheless continued to work as GM, contending that only the NEA can suspend and remove him. The Board then refused to act on Cosalan request to release compensation due him. Cosalan files a complaint with the NLRC against the Board of Benguet Electric, and impleaded Benguet Electric itself as well as the individual members of the board in their official and private capacities. Labor Arbiter rules in favor of Cosalan, holding both the company and the board solidarily liable to Cosalan. NLRC modifies award to Cosalan by declaring Benguet alone, and not the Board members, was liable to Cosalan. Benguet appeals. ISSUE: WON both the corporation and board members are liable to Cosalan.

agreements with several hardware stores for the purchase of the cement. Te then informed Prime White of the orders, but the latter imposed additional conditions, which effectively delayed the delivery of the cement, lowered the number of bags to be delivered, and increased the price per bag. It also made the prices subject to change unilaterally and additional conditions on the manner of payment. Te refused to comply and Prime White cancelled the dealership agreement. Te sued for specific performance and damages. TC ruled in favor of Te. ISSUE: WON the dealership agreement is a valid and enforceable contract binding on the corporation. HELD: NO. It is not valid and enforceable. All corporate powers are exercised by the Board. It may also delegate specific powers to its President or other officers. In the absence of express delegation, a contract entered into by the President in behalf of the corporation, may still bind the latter if the board should ratify expressly or impliedly. In the absence of express or implied ratification, the President may as a general rule bind the corporation through a contract in the ordinary course of business, provided the same is reasonable under the circumstances. These rules are applicable where the President or other officer acting for the corporation is dealing with a third person. The situation is different where a director or officer is dealing with his own corporation. Te was not an ordinary stockholder; he was a member of the Board and Auditor of the corporation. He is what is often called a “self-dealing” director. As a director, he holds a position of trust and owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. The trust relationship springs from the control and guidance of the corporate affairs and property interests of the stockholders. A director’s contract with his corporation is not in all instances void or voidable. If the contract is fair

and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Gokongwei Jr. vs. SEC et. al. (supra) G.R. No. L-45911; April 11, 1979 ISSUE: WON the amended by-laws of SMC of disqualifying a competitor (Interlocking director) from nomination or election to the Board of Directors of SMC are valid and reasonable.

HELD:

Under US corporate law, corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... An amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid." This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good." In the Philippines, section 21 of the Corporation Law expressly provides that a corporation may make bylaws for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer, under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director.”

∞ compiled/edited/digest: KWYB

- 56 -

It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests." In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal. Strong vs. Repide G.R. No. L-2101; November 15, 1906 FACTS: This action was brought to recover 800 shares of the capital stock of the Philippine Sugar Estates Development Company, Limited, an anonymous society formed to hold the Dominican friar lands. The shares were the property of one of the plaintiffs, Mrs. Strong, as part of the estate of her first husband. They were purchased by the defendant through a broker who dealt with her agent, one Jones, who had the script in her possession and who had made the sale without the knowledge of the plaintiff. The defendant was a director, was the managing agent, and was in his own right the majority stockholder of the society. ISSUE: WON a director and majority stockholder must disclose his information to another stockholder before buying stock from him. HELD: YES. The director and controlling stockholder who purchased the shares of another stockholder through an

agent was held to be guilty of concealing the impending purchase of the friar lands they own by the government, a significant fact which would affect the price of the shares. Although ordinarily, the relationship between directors and stockholders of a corporation is not of a fiduciary character as to oblige the director to disclose to a stockholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any form a shareholder, there are cases when such duty and obligation upon the director is present. Being the chief negotiator for the sale of the lands, the director was the only person who knew of the advantages and the impending increase in the value of the shares such that he is precluded from acquiring stocks from other shareholders without first informing them of the pertinent facts affecting the value of the shares being bought. It is fraudulent for a stockholder to buy from a shareholder without disclosing his identity. NOTE: Special Facts Doctrine: a doctrine holding that a corporate officer with superior knowledge gained by virtue of being an insider owes a limited fiduciary duty to a shareholder in transactions involving transfer of stock.

Steinberg vs. Velasco G.R. No. L-30460; March 12, 1929 FACTS: The board of the corporation authorized the purchase of 330shares of capital stock of the corporation and the declaration of dividends at a time when the corporation was indebted and in such a bad financial condition. The directors relied on the face value on the books of its A/R, which had little or no value. Furthermore it appears that two of the directors were permitted to resign so that they could sell

∞ compiled/edited/digest: KWYB

- 57 -

their stock to the corporation. The corporation became insolvent, and the receiver Steinberg sues the directors. ISSUE: Duty to creditors. HELD: Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not declare dividends to stockholders when the corporation is insolvent. In this case, it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and declared the dividends on the stock at the same Board meeting, and that the directors were permitted to resign so that they could sell their stock to the corporation. Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. Either way, they are liable for their actions which affected the financial condition of the corporation and prejudiced creditors. XV. DEVICES AFFECTING CONTROL Everett vs. Asia Banking G.R. No. L-25241; November 3, 1926 FACTS: Teal & Company is indebted to HW Peabody & Co. for P300K for tractors, plows, and parts delivered, of which it has paid P150K. Asia Banking Corp held drafts accepted by Teal under the HW Peabody’s guarantee. Tractors were returned to HW Peabody due to its being unsellable due to financial and agricultural depression in the RP. Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment was delayed until the rescission of the credit of Teal with

Asia Bank. Yet Smith still delivered the order, and Teal at the request and advice of the Bank accepted the drafts and stored the same. Asia Banking persuaded Teal, Peabody, and Smith Kirkpatrick to enter into a “creditor’s agreement” wherein it was mutually agreed that neither of the parties should take action to collect its debts from Teal for 2 years. Teal soon became indebted to Asia Bank for P750,000, secured by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it was advisable that the Bank should temporarily obtain control of the management and affairs of the company. To this end, it was necessary for the stockholders to place their shares in a voting trust to be held by the Bank, and then the Bank would finance Teal under its own supervision. The Teal stockholders were thus induced to enter into the Voting Trust Agreement, with the purpose that the agreement will be intended for the protection of all parties from outside creditors. Shortly after the execution and delivery of the voting trust and the MOA, Mullen as GM of the Bank, caused the displacement and removal stockholder representatives in the Board and the substitution in their place of the Bank’s employees or representatives. The new Board, who have not purchased any share of stock of Teal, proceeded to remove the Corporate Secretary, discharge all the old managers and displace them with creatures of their own choosing whose interest consisted wholly in pleasing themselves and the Bank, and who were wholly foreign to the stockholders. ISSUE: WON the action should have been brought by Teal and Co., and not the majority stockholders thereof. HELD: NO. Teal and Co., including its Board, was already under the control of Asia Banking. Thus, it would have been useless to ask the Board to institute the present suit, and the law does not require litigants to perform useless acts. The court held that the stockholders could bring the said
∞ compiled/edited/digest: KWYB - 58 -

action (in the nature of a derivative suit) on behalf of Teal and Co. When the Board of Directors in a Corporation is under the complete control of the principal defendants in the case and it is obvious that a demand upon the board of directors to institute an action and prosecute the same effectively would be useless, the action may be brought by one or more of the stockholders without such demand. The Court however, did not rule on the propriety or impropriety of the Voting Trust Agreement between the Bank and the Company. NOTE: However, it may be inferred that the stockholders may bring suit against the trustees if the voting trust agreement is being used by the said Trustees to perpetuate fraud against the corporation, as is present in this case. The stockholders would still have legal standing to institute the suit in behalf of the corporation for acts done by the trustees to defraud the corporation, when the said trustees already have control of the Board of the said corporation. A derivative suit is still proper. NIDC vs. Aquino G.R. No. L-34192; June 30, 1988 FACTS: Batjak, a manufacturer of coco oil and copra cake for export, is on the brink of bankruptcy. It entered in to a Financial Agreement with PNB for additional operating capital for its 3 processing mills and to pay its other debts to other banks. Under the agreement with PNB, NIDC, a whollyowned subsidiary of PNB, would invest P6.7M worth of preferred shares convertible within 5 years into common stock to pay off the other debts and the balance to pay off its own due with PNB. PNB also granted various credit accommodations. Batjak as part of the deal mortgaged all its properties in the province. A 5-year voting trust agreement was executed in favor of NIDC by the

stockholders representing 60% outstanding stock of Batjak. Years later, PNB instituted foreclosure proceedings against the mortgaged properties due to Batjak’s insolvency, and soon became owner of the properties. Batjak failed to exercise its right to redeem within the period allowed and PNB transferred ownership of the 2 oil mills to NIDC. Three years later, Batjak represented by majority stockholders, inquired with NIDC if it was still interested in negotiating the renewal of the voting trust agreement. NIDC replied that it was no longer interested and requested turn-over of all Batjak assets and properties. Batjak demanded an accounting of all assets and properties and operations but NIDC refused to comply. Batjak then filed an action for mandamus. CFI Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document or disposing all of the properties of Batjak, and allowed Batjak to inspect the same. Batjak then moved for the appointment of a receiver. NIDC and PNB opposes, but overruled by CFI. MR’s denied. ISSUE: WON NIDC was constituted as trustee of the assets, management and operations of Batjak due to the expiration of the Voting Trust Agreement. HELD: NO. A Voting Trust Agreement only transfers voting or other rights pertaining to the shares subject of the agreement, or control over the stock. Stockholders of a corporation that lost all its assets through foreclosures cannot go after those properties. However, the acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak. XVI. RIGHT OF INSPECTION
∞ compiled/edited/digest: KWYB - 59 -

Pardo vs. Hercules Lumber G.R. No. L-22442; August 1, 1924 FACTS: Corporate secretary of Hercules Lumber refused to permit Pardo, a stockholder, or his agent to inspect the records and business transactions of the company at the times desired by Pardo. Basis of the refusal was the provision in the company’s by-laws which stipulated that every stockholder may examine the books of the company and other documents upon the days which the board annually fixes. ISSUE: When is the time or times within which the right of inspection may be exercised? HELD: The resolution of the board limiting the rights of stockholders to inspect its records to a period of 10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the Corporation Code which provides that the right to inspect can be exercised at reasonable hours. The right of inspection was interpreted to mean that the right may be exercised at reasonable hours on business days throughout the year, and not merely during an arbitrary period of a few days chosen by the directors. Gonzales vs. PNB G.R. No. L-24850; March 1, 1926 FACTS: Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and Communications, the Commissioner of Public Highways, and PNB for alleged anomalies committed regarding the bank’s extension of credit to import public

works equipment intended for the massive development program. The petitioner’s standing was questioned because he did not own any share in PNB. Consequently, Petitioner bought 1 share of PNB stocks in order to gain standing as a stockholder. Petitioner thereafter sought to inquire and ordered PNB to produce its books and records which the Bank refused, invoking the provisions from its charter created by Congress. The petitioner filed petition for mandamus to compel PNB to produce its books and records. The RTC dismissed the petition and it ruled that the right to examine and inspect corporate books is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes. ISSUE: WON the right of inspection may be compelled by Gonzales. HELD: NO. The Code has prescribed limitations to the right of inspection, requiring as a condition for examination that the person requesting must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such must be acting in good faith and for a legitimate purpose. It is the stockholder seeking to exercise the right of inspection to set forth the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales, which was to arm himself with evidence which he can use against the bank for acts done by the latter when he was still a total stranger (i.e. not a SH), were not deemed proper motives and his request was denied. Veraguth vs. Isabela Sugar Co. G.R. No. L-37064; October 4, 1932
∞ compiled/edited/digest: KWYB - 60 -

FACTS: Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., filed a petition with the lower court praying that: a final and absolute writ of mandamus be issued to each and all of the respondent directors to notify him within the reglementary period, of all regular and special meetings of the board of directors of the Company, and to place at his disposal at reasonable hours the minutes, documents, and books of said corporation for his inspection as director and stockholder. He likewise contends that when asked that he be permitted to inspect the books of the corporation, he was denied access on the ground that the board of directors adopted a resolution providing for inspection of the books and the taking of copies only by authority of the President of the corporation previously obtained in each case. ISSUE: WON Veraguth can exercise the right of inspection of the books prior to the approval of the Board. HELD: NO. Directors have the unqualified right to inspect the books and records of a corporation at all reasonable times. Pretexts may not be put forward by the officers to keep a director or stockholder from inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the grounds that the director or stockholders are on unfriendly terms with the officers. A director or stockholder has no absolute right to secure certified copies of the minutes until these minutes have been written up and approved by the directors. Gokongwei Jr. vs. SEC et. al. (supra) G.R. No. L-45911; April 11, 1979

ISSUE:

WON Gokongwei may be allowed to inspect the books of the corporation. HELD: YES. Where the right to inspect is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. The inspection has to be germane to the petitioner’s interest as a stockholder and has to be proper and lawful in character and not inimical to the interest of the corporation. The stockholder’s right to inspect is based on his ownership of the assets and property of the corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, beneficial ownership, or quasiownership, and is predicated upon the necessity of selfprotection. On application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder’s good faith and his purpose and motives in seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the law take from the stockholder the burden of showing the propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would be more in accord with equity, good faith, and fair dealing to construe the statutory right of Gokongwei as stockholder to inspect the books of the parent as extending to the books of the subsidiary in its control. XVII. DERIVATIVE SUIT

∞ compiled/edited/digest: KWYB

- 61 -

Evangelista vs. Santos G.R. No. L-1721; May 19, 1950 FACTS: Plaintiffs, minority stockholders of Vitali Lumber Company, alleges in their complaint that defendant as president, manager and treasurer of their company, through fault, neglect and abandonment allowed it lumber concession to lapse and its properties and assets to disappear causing the complete ruin of the corporation’s operation and total depreciation of its stocks. They pray for an accounting from the defendant of the corporate affairs and assets, payment to them of the value of their respective participation in said assets on the basis of the value of the stocks held by each of them and to pay the cost of the suit. ISSUE: WON the plaintiff-stockholders has the right to bring suit in their benefit. HELD: NO. The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities something which cannot be legally done. But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to

protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any of the stockholders is allowed to bring suit. But in that case, the corporation is the real party in interest. Republic Bank vs. Cuaderno G.R. No. L-22399; March 30, 1967 FACTS: A derivative suit was brought against the officers and the board. Complaint alleged that the directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers. Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of the corporation. ISSUE: WON the action cannot prosper for failure to compel the board to file suit in behalf of the corporation. HELD: NO. It is settled that an individual stockholder is permitted to institute a derivative or representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. Normally, it is the corporation through the board of directors which should bring the suit. But as in this case, the members of the board of directors of the bank were the nominees and creatures of respondent Roman and thus, any demand for

∞ compiled/edited/digest: KWYB

- 62 -

an intra-corporate remedy would be futile, the stockholder is permitted to bring a derivative suit. Should the corporation be made a party? The English practice is to make the corporation a party plaintiff while the US practice is to make it a party defendant. What is important though is that the corporation should be made a party in order to make the court's ruling binding upon it and thus bar any future re-litigation of the issues. San Miguel Corporation vs. Khan G.R. No. 85339; August 11, 1989 FACTS: Fourteen corporations initially acquired shares of outstanding capital stock of SMC and constituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter died Eduardo Cojuanco was elected as the substitute trustee. However, after the EDSA revolution, Cojuanco fled out of the country, and subsequently an agreement was entered into between the 14 corporations and Andres Soriano III (as an agent of several persons) for the purchase of the shares held by the former. Actually the buyer of the shares was Neptunia Corporation, a foreign corporation and wholly-owned subsidiary of another subsidiary wholly owned by SMC. Neptunia paid the downpayment from the proceeds of certain loans. PCGG then sequestered the shares subject of the sale so SMC suspended all the other installments of the price to the sellers. The 14 corporations then sued for rescission and damages. Meanwhile, PCGG directed SMC to issue qualifying shares to seven (7) individuals including Eduardo de los Angeles from the sequestered shares for them to hold in trust. Then, the SMC’s board of directors passed a resolution assuming the loans incurred by Neptunia for the downpayment. De los Angeles assailed the resolution alleging that it was not passed by the board aside from its deleterious effects on the corporation’s interest. When his

efforts to obtain relief within the corporation proved futile, he filed this action with the SEC. Respondent directors alleged that de los Angeles has no legal standing having been merely “imposed” by the PCGG and that the twenty (20) shares owned by him personally cannot fairly and adequately represent the interest of the minority. ISSUE: WON de los Angeles have the legal standing to sue. (Derivative suit) HELD: YES. The bona fide ownership by a stockholder in his own right suffices to invest him with the standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him individually but in behalf and for the benefit of the corporation. The requisites of a derivative suit are: (1) the party bringing the suit should be a stockholder as of the time of the act or transactions complained of, the number of shares not being material; (2) exhaustion of intra-corporate remedies (has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea); and (3) the cause of action actually devolves on the corporation and not to the particular stockholder bringing the suit. Yu vs. Yukayguan G.R. No. 177549; June 18, 2009 FACTS: The case stemmed from the petition of Anthony Yu et. al. against his younger half-brother Joseph Yukayguan et. al., who were all shareholders of Winchester Industrial

∞ compiled/edited/digest: KWYB

- 63 -

Supply Inc., a company engaged in hardware and industrial equipment business. Accusing his older brother’s family of misappropriating funds and assets of the company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial Court dismissed the case, saying Yukayguan failed to follow and observe the essentials for filing of a derivative suit or action. The ruling was upheld but later reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC. ISSUE: Mandatory requirements before courts can give due course to derivative suits – or legal actions that may be taken by a stockholders on behalf of a corporation or association. HELD: The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying with the clear requirements and formalities of the rules for filing a derivative suit. A stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. However, there are mandatory requirements before a derivative suit can be given due course by the Court. Citing Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the SC said derivative actions may be filed provided that the suing party was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; and he exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the

corporation or partnership to obtain the relief he desires. As additional requirements, the SC said there must be no appraisal rights — which would allow a stockholder to sell his holdings back to the company – available and the suit is not a nuisance or harassment suit. XVIII. MERGERS AND CONSOLIDATION Global Business Holdings vs. Surecomp Software G.R. No. 173463; October 13, 2010 FACTS: Respondent Surecomp Software, a foreign corporation duly organized and existing under the laws of the Netherlands, entered into a software license agreement with Asian Bank Corporation (ABC), a domestic corporation, for the use of its IMEX Software System (System) in the bank’s computer system. ABC merged with petitioner Global Business Holdings with Global as the surviving corporation. When Global took over the operations of ABC, it found the System unworkable for its operations, and informed Surecomp of its decision to discontinue with the agreement and to stop further payments thereon. Consequently, for failure of Global to pay its obligations under the agreement despite demands, Surecomp filed a complaint for breach of contract. ISSUE: WON Global shall be responsible for all the liabilities and obligations of ABC after having merged with the latter. HELD: YES. It cannot be denied that there is indeed a contract entered into between Surecomp and Global, the latter as a successor-in-interest of the merging, Global is estopped from denying Surecomp’s capacity to sue it for alleged breach of that contract with damages.

∞ compiled/edited/digest: KWYB

- 64 -

In the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation. Edward Nell Company vs. Pacific Farms G.R. No. L-20850; November 29, 1965 FACTS: The Edward Nell Co. secured a judgment representing the unpaid balance of the price of a pump sold to Insular Farms. Pacific Farms then purchased all or substantially all of shares of stock as well as real and personal property of Insular, selling the shares to certain individuals who reorganized Insular. The board of the reorganized Insular then sold its assets to be sold to Pacific for P10000. The writ of execution was returned, stating that Insular had no leviable property. Nell Co sued Pacific Farms, on the ground as a result of the purchase of all or substantially all assets of Insular, Pacific became the alter ego of Insular Farms. ISSUE: WON a corporation who sells or otherwise transfers all of its assets to another corporation is liable for debts and liabilities of the transferor. HELD: NO. Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.

In the case at bar, there is neither proof nor allegation that appellee had made any of the above exceptions. Hence, Pacific Farms cannot assume the debts and liabilities of Insular Farms. Laguna Transportation vs. SSS G.R. No. L-14606; April 28, 1960 FACTS: Petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance of Laguna petition praying that an order be issued by the court declaring that it is not bound to register as a member of respondent Social Security System and, therefore, not obliged to pay to the latter the contributions required under the Social Security Act. To this petition, respondent filed its answer praying for its dismissal due to petitioner's failure to exhaust administrative remedies, and for a declaration that petitioner is covered by said Act, since the latter's business has been in operation for at least 2 years prior to the enactment of the Social Security Act. ISSUE: WON a partnership later converted to a corporation, which continued the same line of business, is still liable to the debts and liabilities of the partnership. HELD: YES. Although, a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. However, where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for
∞ compiled/edited/digest: KWYB - 65 -

which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefore. Lozano vs. De los Santos G.R. No. 125221; June 19, 1997 FACTS: Petitioner was the president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while private respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc. (SAMAJODA). Upon the request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA). Petitioner and private respondent also agreed to elect one set of officers who shall be given the sole authority to collect the daily dues from the members of the consolidated association; elections were held and both petitioner and private respondent ran for president; petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the election. Petitioner filed a case for damages against private respondent in MCTC. The latter moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged with the SEC. MCTC denied. Appealed to the RTC, the latter reversed MCTC’s ruling. ISSUE: Is there consolidation between petitioner and private respondent? When do consolidation becomes effective? HELD: NO. There is no intracorporate nor partnership relation between petitioner and private respondent. The

controversy between them arose out of their plan to consolidate their respective jeepney drivers' and operators' associations into a single common association. This unified association was, however, still a proposal. It had not been approved by the SEC, neither had its officers and members submitted their articles of consolidation in accordance with Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. When the SEC, upon processing and examining the articles of consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of consolidation which makes the reorganization official. The new consolidated corporation comes into existence and the constituent corporations dissolve and cease to exist. Reyes et. al. vs. Blouse et. al. G.R. No. L-4420; May 19, 1952 FACTS: Minority stockholders of the Laguna Tayabas Bus Co. file an action to enjoin Blouse et. al. from executing its resolution approved by 99 ½% of stockholders to consolidate the properties and franchises of Laguna Tayabas with Batangas Transport. Blouse believes it is merely an exchange of properties and not a consolidation. ISSUE: WON the real purpose of the resolution is merger or consolidation, and if so, whether it can be carried out under the old Corporation Law. HELD: The questioned resolution charges the board of Laguna to consolidate properties and franchises thereof with that of Batangas Transport. Both corporations have passed
∞ compiled/edited/digest: KWYB - 66 -

similar resolutions to take steps to effect the consolidation. It is apparent that the purpose of the resolution is not to dissolve but to merely transfer its assets to a new corporation in exchange for its shares. This comes within the purview of the old corporation law, which provides that a corporation may sell, exchange, lease or otherwise dispose of all its property and assets when authorized by affirmative vote of 2/3 of stockholders. The words "or other wise disposed of" is very broad and in a sense covers a merger or consolidation. However, the transaction in this case cannot be considered as a merger or consolidation because a merger implies the termination or cessation of the merged corporations and not merely a merger of assets and properties. The two companies will not lose their corporate existence but will continue to exist even after the consolidation. What is intended by the resolution is merely a consolidation of properties and assets, to be managed and operated by a new corporation, and not a merger of the corporations themselves. XIX. DISSOLUTION National Abaca vs. Pore G.R. No. L-16779; August 16, 1961 FACTS: Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of money advanced to her for the purchase of hemp. She moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950. Plaintiff objected to such by saying that it shall nevertheless be continued as a corporate body for a period of 3 years from the effective date of said order for the purpose of prosecuting and defending suits by or against it and to enable the Board of Liquidators to close its affairs. ISSUE:

Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of said period? HELD: The Corporation Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for the purposes of prosecuting and defending suits by or against it. But at any time during the 3 years, the corporation should convey all its property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands. Since the case against Pore was strong, the corporation’s amended complaint was admitted and the case was remanded to the lower court. Clemente vs. CA G.R. No. 82407; March 27, 1995 FACTS: Plaintiffs sought to be declared owners of a parcel of land owned by Sociedad Popular Calambena, a Sociedad Anonima. Plaintiffs are stockholders of the latter corporation. However, there was no proof that taxes were paid by the Sociedad and neither were there efforts exerted by the latter to consolidate title over the property. No explanation was offered as to how and when the property came into the possession of the defendants. Plaintiffs were not able to come up with any evidence to substantiate their claim of ownership of the assets. The trial court dismissed the complaint not merely on what it apparently perceived to be an insufficiency of the evidence that firmly could establish plaintiffs' claim of ownership over the property in dispute but also on its thesis that, absent a corporate liquidation, it is the corporation, not the stockholders, which can assert, if at all, any title to the corporate assets. The court, even then, expressed some

∞ compiled/edited/digest: KWYB

- 67 -

reservations on the corporation's being able to still validly pursue such a claim. ISSUE: Effect of Dissolution. HELD: The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the right and liabilities of such entity nor those of its owners and creditors. If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. In the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. XX. LIQUIDATION China Banking vs. Michelin 58 Phil. 261 FACTS: George O’Farrel & Cie Inc. is a domestic corporation acting as agent and representative of the Michelin & Cie, a

foreign corporation engaged in the sale and distribution of Michelin tires. Michelin decided to discontinue their business relations, and it was discovered that O’Farrel failed to account for an amount representing the price of tires sold by the latter. Michelin claims the money was disposed by O’Farrel for its own use and benefit and without the authority or consent of Michelin. Gaston O’Farrel (the person) and Sanchez executed a mortgage on the house of O’Farrel and shares owned by both to guarantee payment of the amount to the Michelin, but left a balance which the latter seeks to recover. The board of O’Farrel filed a petition for its dissolution and sought the appointment of Gaston as receiver and liquidator, which was granted by TC. Michelin filed its claim against O’Farrel Corp with a prayer that its claim be allowed as a preferred one against the latter. TC grants motion of Michelin. Nobody except Michelin and Gaston was notified of the order. China Bank intervened and moved that Michelin’s claim be allowed as an ordinary one under the Insolvency Law and sought the nullification of the TC orders. ISSUE: Liquidation. HELD: The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases, the receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts, all claims must be presented for allowance to the receiver or trustees or other proper persons during the winding-up proceedings within the 3 years provided by the Corporation Law as the term for the corporate existence of the corporation, and if a
∞ compiled/edited/digest: KWYB - 68 -

claim is disputed so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter ruling, and during the winding-up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors. NOTE: Under the Corporation Code, it is the SEC which may appoint the receiver. Republic of the Philippines vs. Marsman Development Corp. G.R. No. L-18956; April 27, 1972 FACTS: Defendant corporation was a timber license holder with concessions in Camarines Norte. Investigations led to the discovery that certain taxes were due on it. BIR assessed Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the corporation, received the first 2 assessments. He requested for reinvestigations. As a result, corporation failed to pay within the prescribed period. Numerous BIR warnings were given. After 3 years of futile notifications, BIR sued the corporation. ISSUE: WON present action is barred by prescription, in light of the fact that the corporation law allows corporations to continue only for 3 years after its dissolution, for the purpose of presenting or defending suits by or against it, and to settle its affairs. HELD: NO. Although Marsman was extra-judicially dissolved, with the 3-year rule, nothing however bars an action for

recovery of corporate debts against the liquidators. In fact, the 1st assessment was given before dissolution, while the 2nd and 3rd assessments were given just 6 months after dissolution (within the 3-year rule). Such facts definitely established that the Government was a creditor of the corporation for whom the liquidator was supposed to hold assets of the corporation. NOTE: Code provides for a 3-year period for continuation of the corporate existence for purposes of liquidation, BUT there is nothing in the provision which bars an action for recovery of debts of the corporation against the liquidator himself, after the lapse of the 3-year period.

Tan Tiong Bio vs. CIR G.R. No. L-15778; April 23, 1962 FACTS: Tan Tiong Bio et. al. are incorporators and directors of the Central Syndicate. The company realized a net profit of close to P300K, and sale of goods was the only transaction undertaken by it. BIR sues the Tan Tiong et. al. for deficiency sales taxes and surcharges on surplus goods purchased by the corporation from the Foreign Liquidation Commission. Corporation was dissolved, and Tan Tiong and company substituted themselves as parties, thereby becoming successors-in-interests in the corporate assets after liquidation. TC rules in favor of BIR, and Tan Tiong et. al. appeals, claiming that they cannot be held liable for tax liability there being no law authorizing the government to proceed against stockholders of a defunct corporation as transferees of the corporate assets upon liquidation. If they were liable, it is only to the extent of the benefits derived by them, and that the action is barred by prescription due to the 3-year limit in the corporation law.
∞ compiled/edited/digest: KWYB - 69 -

ISSUE: WON the sales tax can be enforced against the corporation’s successors-in-interest, even if corporation has been dissolved by expiration of corporate existence. HELD: The creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, once they pass into the hands of the stockholders. The dissolution of a corporation does not extinguish the debts due or owing to it. An indebtedness of a corporation to the government for income and excess profit taxes is not extinguished by the dissolution of the corporation. The hands of government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held personally liable for the corporation's taxes, being successors-in-interest of the defunct corporation. XXII. SECURITIES REGULATION CODE CEMCO vs. National Life Insurance Co. G.R. No. 171815; August 7, 2007 FACTS: Union Cement Corporation (UCC), a publicly listed company, has two principal stockholders – UCHC, a non listed company, and petitioner CEMCO. A majority of UCHC’s

stocks were owned by Bacnotan Consolidated Industries (BCI) and Atlas Cement Corporations (ACC). CEMCO holds 9% of UCHC’s stocks. BCI informed the Philippine Stock Exchange that its subsidiary ACC had passed resolutions to sell to CEMCO all their stocks in UCHC. PSE sent a letter to SEC to inquire as to whether the Tender Offer Rule under the Securities Regulation Code would apply. The SEC replied that the transaction is not covered by the tender offer rule. On August 12, 2004, the sale of the stocks was consummated and closed. National Life Insurance Co. of the Philippines, a minority stockholder in UCC filed a complaint with the SEC asking the latter to declare the purchase agreement void for being violative of the tender offer rule. CEMCO filed a comment to the complaint. The SEC ruled in favor of National Life Insurance and declared the transaction to be void for being in violation of the tender offer rule. CEMCO filed a petition with the Court of Appeals challenging the SEC’s jurisdiction on the ground that the SEC’s authority is purely administrative and does not extend to adjudication. The CA upheld the SEC’s ruling. It ruled that CEMCO is estopped in questioning the jurisdiction of the SEC. Hence, this present petition. ISSUE: (1) WON SEC has jurisdiction. (2) WON mandatory tender offer rule applies only to direct acquisition of shares in the public company. HELD: (1) YES. SEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code. The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19 thereof. (2) NO. Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. A
∞ compiled/edited/digest: KWYB - 70 -

public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company. Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Under existing SEC Rules, the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company. The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule. It accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” Philippine Veterans Bank vs. Callangan G.R. No. 191995; August 3, 2011 FACTS: Respondent Callangan, the Director of the Corporation Finance Department of the SEC, sent the Bank a letter, informing it that it qualifies as a "public company" under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC. The Bank is thus required to comply with the reportorial requirements set forth in Section 17.1 of the SRC. The Bank responded by explaining that it should not be considered a "public company" because it is a private company whose shares of stock are available only to a limited class or sector, i.e., to World War

II veterans, and not to the general public. Respondent rejected the Bank's explanation and assessed it a penalty for failing to comply with the SRC reportorial requirements from 2001 to 2003. The Bank moved for the reconsideration of the assessment, but respondent denied the motion. SEC en banc and CA affirmed the SEC’s ruling. Hence, this petition for review on certiorari. ISSUE: WON petitioner-bank is a public company under the provisions of SRC. HELD: YES. A public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company. From these provisions, it is clear that a "public company," as contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; even companies like the Bank, whose shares are offered only to a specific group of people, are considered a public company, provided they meet the requirements enumerated above.

∞ compiled/edited/digest: KWYB

- 71 -

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.